Executive Summary
Oil and gas are very sensitive products. This industry is one of the most lucrative industries in the world. Various operators have succeeded in oil drilling projects, especially when they get experienced and committed drilling contractors.
The relationship between the drilling contractor and the operator should always be clearly defined. The drilling contractor has the duty of drilling the oil and delivering it to the operator. The operator will be responsible for transportation, storage and commercialization of the product.
The operator will also be responsible for meeting all the legal requirements in order to smoothen the operation process. It is also important to note that the process legalizing the whole project should be done with relevant agencies. Environmental agencies should be contacted in order to get their approval.
The process of drilling oil, its transportation, storage and sale is always dangerous to the environment. Spillage of oil can cause serious environmental damage both on land and in water. A leakage of gas can result in a catastrophe in that particular area.
Relevant agencies must therefore approve such projects by determining that the operator, and the drilling company has the capacity to ensure that the whole process is safe enough.
The Role of the Various Organisations Involved In the Oil & Gas Industry
Critical Operations Issues Between Operator and Drilling Contractor
Material and Equipments
One of the critical operations issues between the operator and the drilling contractor is the materials and equipments. It is a standard practice that it is the responsibility of the contractor to have relevant materials.
This should be indicated clearly, stating their quality and quantity in order to avoid disputes. The operator should therefore define the standards of the equipments and materials needed when developing the contract.
Personnel
It is the responsibility of the contractor to bring along qualified and experienced personnel to work on the project. The contractor should ensure that the personnel meet the set physical and academic criteria, and that they are tested for medical fitness before their deployment.
Duration
When signing the contract, it is important to clearly state the duration that the project will take in details. This will help avoid conflicts that always arise due to delays by the contractor to complete the project in time.
However, there should be a clause allowing the project to be closed earlier if it is finished before the stipulated date, or late if there are delays, and any possible consequences for the delays (Kousholt 2007, p. 90).
Defective performance
It is always common to have cases where the assigned work is not done as per the expectations. There must be a provision for such defective work. The operator should inform the contractor the nature of such defects within the right time.
It will be the responsibility of the contractor to go over the work again and correct the identified mistakes at its own expense. The operator may be granted the right to look for the third party in case the defect done by the contractor is too gross and indicates that the operator has no capacity to perform the task properly.
Risk Allocation
In any drilling operations, risks and uncertainties cannot be ignored because they can occur. It would therefore be very prudent to clearly indicate how such risks are allocated between the contractor and the operator.
It will be important to identify possible risks that may occur, and the stages at which they might occur, in order to allocate them either to the operator on contractor.
Insurance
The need for insuring the whole project is very obvious, given the uncertainties stated above. Both the operator and the contractor will be expected to meet specific costs towards the coverage.
The insurance should be taken with a reputable firm that will meet its responsibility should it arise. Some of areas that should be covered include commercial general insurance, general third party insurance and third party insurance.
According to Kousholt (2007, p. 90), when two firms come together to work towards a common goal, the driving force is always to share the responsibilities that comes with achieving this goal. The partnering units must embrace togetherness. They must accept working together as a unit in order to have the much expected success.
Critical Operational Issues Between Operator and External Agencies (NGO)
The oil company will need to come up with three main external agencies (NGO). The three include those concerned with transparency, anticorruption and environment. The environmental agency will work in close coordination with the firm to ensure that the environment is not polluted.
This may involve conducting regular inspection at the site, and making recommendation on how best the firm can improve its operations to minimize environmental pollution. Cases such as oil spillage will be eliminated. Environment will be protected from degradation.
The transparency body will help ensure that the firm operates within the legal limits of the country. It will also ensure that all the relevant partners in this project relates well. The anticorruption agency will ensure that the project observes all the financial obligations it has towards various bodies within the country.
The anticorruption and transparency agencies will also ensure that this firm relates well with the society in general. The environmental body will be instrumental in case there is need to participate in corporate social responsibility such as tree planting.
Critical Operational Issues in the Relationship Between the Operator and the UK Government
According to Gerry and Scholes (2008, p. 114), the government is the most important agency that a firm must ensure it conforms to its policies. The government enacts laws and regulations that govern gas and oil production within the country.
The government of the United Kingdom has various expectations, and rules that all the firms operating in the country must follow. Different firms in different industries have differing expectations from the government. The government also has different expectations for firms in different industries.
In order to ensure that these firms are closely monitored, the government works with different agencies within the country. The department of energy will be directly responsible for monitoring of the activities of all the firms in this industry. The operator must therefore ensure that it acts within the expectations of this department.
The government will always act in a way to protect the firm as a way of developing the economy. The operator should therefore ensure that the government finds all the reasons to protect the firm and give it the necessary support that would ensure that it succeeds.
The government also needs to ensure that there is local involvement and participation in various activities in the project. The government always appreciates it when a firm employs the locals whenever there is an opportunity. There should also be national participation. Risks should also be kept as minimal as possible.
On the other side, the operator will also have its concerns to put to the government. It would prefer a longer exploration within the country (Lewis 2006, p. 5). Also of concern to the operator will be relaxed regulations that would ensure that it operates with minimal ease.
The operator will also need better tax deals with the government as a way of increasing the profitability of the project.
Petroleum Economics and Taxation Regimes, Legal Arrangements and Contractual Relationships
Analysis and Contrast of the Advantages of the Concession and PSA governance Regimes from the Viewpoint of the Sovereign State
In the global world, governments have always ensured that they control the development projects to their favor. A sovereign state would always make an effort to ensure that it develops the local economy as a way of developing itself.
When a state becomes sovereign, there is always the spirit of nationalism. Firms always try to ensure that they get all the resources that the sovereign state would need. There would be an attempt to ensure that the nation is freed from any external interference.
Interference may come in various fronts, including the need to depend on external support to run the state. Various sovereign states have therefore been very keen to incline development to their favor.
They make every effort to ensure that all firms that operate within the country are able to help in the development of that nation. To make it clearer, it would be important to analyze advantages and disadvantages from the two standpoints.
Concession
Advantages to the government
- The government will get secure and regular revenues at very little effort, increasing its capacity to build the nation.
- It facilitates early engagement of the oil firm to the government, and the commitment is has towards the government.
Disadvantages to the government
- The government will be the sole bearer of risks that is related to the project. This can result in massive loss to the government.
- This strategy potentially widens choice of the government on partners to embrace large service companies.
- There will be no upsides from high economic rents. It will not be in a position to take advantage of the high economic rents fully.
- The government will have no control in the manner and schedule of development taken in this strategy.
Advantages to the operator
- It will be able to secure broad control and right over the reserves, and it will be in a position to dictate the pace of development.
- It will be in a position to take advantage of the high economic rents.
- It will be easy to achieve vertical integration of companies.
Disadvantages to the operator
- Given that the strategy seems to be biased to the favor of the operator, there is a higher risk of nationalism (Murch 2004, p. 59).
- The operator will be forced to enter into new negotiations whenever there is a change of power.
Product Sharing Agreement
Advantages to the government
- In this strategy, all the operative risks are carried by the operator, meaning that the government will be shielded from any consequences resulting from such losses (Lewis 2006, p. 43).
- The government shall be in a position to secure upsides from high economic rents.
- The government will retain ownership of the petroleum products produced and all the associated installations.
- The exploration risks will also be transferred to the operator.
Disadvantages to the government
- Given that exploration risks can be great; this strategy may deter potential investors.
- The government may not secure all benefits associated with the projects given the fact that it will avoid taking heavy responsibilities.
Advantages to the operator
- This strategy will allow the operator a possible entry point for future business operations.
- Given technical capability, the operator may convince the insurance company to lower the coverage cost, making the whole process very attractive.
- The operator will be entitled to share oil produced in the project.
- In this strategy, there is always equitable share of rents and costs.
Disadvantages to the operator
- The operator will bear all the exploration costs. This can have serious financial consequences on it.
- The operator will have to cede significant control share to the government in regard to the nature and pace of development of the project.
Comparative Numerical Sensitivity Assessment of the Project Profitability to Variation in the Sales Gas Price Within Each Regime
The profitability of this project relies on a number of factors. The cash flow statement of this project shows that there has been a constant profitability. The statement shows that the project has the capacity to succeed in this industry. It is a fact that that this firm has can have success if it succeeds.
The operating costs of this firm and the taxable income indicate that the firm is profitable. The costs of operation are always an indication of the profitability of the firm. According to Murch (2004, p. 53), the costs of operation should be low, and the income generation should be high.
The ability of the firm to succeed always depends on low costs of operation. The costs of operation should always be minimized as much as possible. Minimizing the costs of the firm’s operation is one of the ways of increasing their profitability.
The profitability of the firm is likely to be on the rise. The firm has been able to withstand the pressure locally. The taxable income of this firm shows that the firm has had a rise in its operating income. The operating income of the firm always determines its taxable income.
Given the high taxable income of the firm, it is a demonstration that this project is profitable. The sales of the gas within the product sharing agreement regime will involve low costs. The taxation will be reduced. However, under a concession agreement, the profitability will be reduced because of the increased taxation.
Review the Risks Faced by the Industry and Means of Identifying and Managing Them
The risks faced in this industry can be categorized into four aspects. There are technological risks. This may come in the form of lack of reliable system within the project. This may result in serious damages to the project and its profitability.
This can be avoided by having the right employees with technological knowledge in this field. Another major risk is political and fiscal risks. Political risks may have heavy financial consequences in the firm. For instance, changing of the regime will overburden the project through spiraling taxation.
Cases where there is political instability in the country may further jeopardize the profitability of the project. It may be difficult to mitigate political risks. As a result of this, the best approach to take in this case would be to take comprehensive insurance coverage against political uncertainties.
The project may also face economic risks. Market volatility is the most common economic risks. The prices of oil in the international markets keeps rising and falling frequently. When the prices falls the project may be as less productive as it had been expected.
Another risk is on the environment. When this oil spills on the leaves of any vegetation, it suffocates the plants by blocking the air passages on the surface of the leaf. The vegetation will dry off due to lack of air. This oil is also dangerous to the organisms that live under the soil.
It suffocates these organisms. When the spillage is swept into water bodies such as lakes, the effect becomes even worse. Oil always form a thick layer (blanket) on top of water. This thick layer will always prevent air from moving into water. All the living organisms that are under that water will perish for lack or air.
The effect will viciously affect other organisms that depend on the organisms that have been destroyed in that particular water body. When the living organisms in water are destroyed, other organisms which may not be directly killed by this oil such as crocodile may feel the impact of this destruction.
With other organisms they depend on destroyed, these predators may have nothing to depend on. This may lead to their death within that particular habitat.
The firm also faces some risks. Environmental bodies will be keenly monitoring the operations of the firm. They will be keen on ensuring that the firm is taken to task over any case of environmental pollution. The agencies will take the firm to court over cases of environmental pollution.
This can result in serious fines that can negatively impact on the firm. The litigation process can also bring negative image on the firm. This may cost this firm a lot of resources trying to rebuild the tainted image of the firm. Besides the losses resulting from litigation, this project can also result in losses from cases involving spillage.
When there is oil spillage, the firm will suffer a loss to the extent of the spilled oil. There are cases where cargo on transit is hijacked by pirates. This is one of the ways through which firms have suffered serious losses (Murch 2004, p. 27).
When the cargo is hijacked, the loss will be to the extent of the hijacked cargo, or even more, because the storage vessels will also be lost. The fluctuation of oil prices is another risk.
When the oil prices slumps, the firm will get revenues below the expected value. This will mean that the firm will have to find a mechanism through which this deficit will be taken care of.
The government may also face some risks in this project. One of the main roles of the government is to ensure that the society is clean and that various agencies operate without any interference from other agencies.
A project that involves oil drilling and transportation may have serious negative impact to the society, and hence the government. The BP oil spillage in 2010 has serious impact on the American society. Various economic activities in various beaches in the United States were brought to a halt because of this spillage.
This clearly demonstrates that government will always be at risk when such incidents occur. The tax generated from such activities will be lost. The populace who are affected by such cases will be left jobless. This will affect the government.
Awareness of Future Oil and Gas Sources and Social Responsibility and Climate Change Issues
Corporate social responsibility has become one of the most important functions of firms in the current society. There is need for firms to give back to the society. They need to give back to the society because they take away various resources from this society.
When a firm that is involved in oil drilling takes part in corporate social responsibility, it will be giving back to the society what it has taken away from it. Oil drilling involves destruction of the environment. It involves activities that will leave the land barren.
This barren land may not benefit this community in any way. To compensate for this destruction, the firm should make an effort to ensure that it helps in making other regions around this place greener. The firm may take part in planting of trees in this region.
It should also encourage and support farmers in this region. This way, the firm will try to counter the impact they had on the environment.
Corporate social responsibility is always a way of gaining a positive image in the society. The current society is very sensitive (Inkpen & Moffett 2011, p. 64). A firm can lose customers when they are accused of causing mayhem to the environment.
Firms therefore take part in corporate social responsibility as a way of ensuring that it gains the favor of the watchdogs of the environment. This would help the firm strike a positive relationship with various governmental agencies within the country.
Such agencies may use the firm as a positive example of a firm which is not self-centered. This would enable the firm to be embraced by the society. Corporate social responsibility also helps in marketing the firm positively within the target market.
Instead of undertaking a commercial advertisement directly, firms consider participating in corporate social responsibility. This way, they will be advertised positively in the market.
Analysis of the Challenges Facing the Adoption of Shale Gas Extraction in the UK
The United Kingdom is one of the largest consumers of oil and oil products in the world. This country will therefore have a huge benefit when a firm is able to extract oil from the country. A firm that is able to extract oil within this country will have a huge benefit due to a number of reasons.
Shale gas can have a huge benefit when is able to extract oil within the country (Roberts 2011, p. 115). The firm will have a ready market for its products. This means that this firm will not incur costs associated with transportation of the product, and its storage facilities.
The firm is also expected to benefit from government incentives as a way of encouraging local production of this product. There are a host of other benefits that this firm stands to benefit by conducting local production. However, there are some challenges that this firm faces within this country.
Challenges facing Shale gas can be looked from four main fronts. They include social front, environmental front, political front and economic front. Shale gas faces a serious challenge of protecting the environment in the operations.
Environmental bodies in the United Kingdom are always very keen on monitoring operations of firms within the country to ensure that they do not pollute the environment. Shale gas will have the responsibility of ensuring that its operations within this country do not engage in environmental pollution.
This makes the operation very difficult. The firm also faces the challenge of ensuring that the society develops a positive image for its products to be accepted locally (Murch 2004, p. 75). This is because the locals have come to embrace BP as the main producer of their petroleum products.
Convincing the market that Shale gas will give them superior value may take some time. Shale gas will have to undertake serious marketing within this market in order to win trust of the market.
The competition posed by other major players in this industry may be posing serious challenge to the firm. When the management is not able to counter the competition posed by the competitors, then the firm may be forced out of this industry.
One of the firms posing serious challenge to Shale gas is PB. PB has been able to create a positive image in the local market. The brand is very strong, and it will require Shale gas to develop serious techniques.
List of References
Gerry, J & Scholes, K 2008, Exploring Corporate Strategy, Pearson Education, Limited, New York.
Inkpen, A & Moffett, M 2011, The global oil and gas industry: management, strategy and finance, Tulsa, Okla.
Kousholt, B 2007, Project management: theory and practice, Cengage, New York.
Lewis, J 2006, Fundamentals of project management, American Management Association, New York.
Murch, R 2004, Project management: best practices for IT professionals, Prentice Hall PTR, Upper Saddle River.
Roberts, P 2011, Effective project management, Kogan Page, London.