Oil companies research

Published: 2018-09-13 01:13:48
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Using diverse strategie

As oil companies attempt to answer questions on how to lock demand and thrive in the oversupply period; the question on whether to enhance their efficiency or adjust their portfolios using diverse strategies cannot be eliminated. As such, several oil corporations have opted to the evaluation of if they are “well for the $50/barrel” or not. However, even in if being well for the $50/barrel is too draconian, oil companies, having materialized from duration marked by rapid expansion and increased growth to an epoch of commodity oversupply the companies are forced to review their strategies. Moreover, it is recommended that the companies’ main focus should be adoption of strategies that drives capital and operation efficiency so as to sustain their margins and the reinvestment rates that are vital to production growth. This paper has, therefore, been written with the objective of reviewing the best strategy that the firms can adopt to ensure highest impacts and sustainable returns.

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The optimum energy mix strategy, which entails the adoption of renewable and traditional energy portfolios, as been touted as one of the best strategies given that it allow oil companies to spread their investment risks while remaining competitive. According to Folio Investing (2015), adoption of an optimum energy mix strategy is also prone to offer the organization not only other alternative sources of income but also a return on investment potential. In spite of the extant reduced oil prices, adoption of a strategy that takes in conventional fuels and renewable energy portfolio is considered as a great means for the companies to potentially gain advantages from returns that surpasses a number of the market-founded investments.

Why Investment in Optimum Energy Mix not be undertaken

Additionally, diversification of portfolio has also been touted to be advantageous to oil companies given that it enables the organizations to compete favorably with organizations that are producing and selling renewable energy. For instance, by taking on the production of clean energy such as wind energy, an oil company will be able to compete with firms that produce wind energy while at the same time maximizing their profits.

As a strategy, optimum energy mix may take much longer before the profits are realized. Thus, the realization of the ROI might be longer than was initially anticipated. Optimum energy mix strategy also encompasses risks that include environmental regulations, financial risks, and lack of adequate expertise and skills. Development of renewable energy needs precise areas and this may not be easy to acquire and might also involve other additional costs. Over and above demanding strict supervision for the company’s management, stiff competition exists in the renewable energy industry given the observation that newer technologies are developed frequently. This necessitated the need to regularly monitor the shifting market dynamics. Additionally, the renewable energy market forms a smaller percentage of the global energy industry. Lastly, optimum energy mix as a strategy is bound to face challenges with regards to pricing given that very few people are enthusiastic to pay a premium fee for the energy, and that the investment costs incurred in developing renewable energy sources are always to high.

Innovative developments and R&D as a Strategy

Innovation has been regarded as a key differentiator in extant organizations. Thriving organizations have acknowledged that to maintain a competitive edge and attain profitability they have to continuously innovate. As such, development of effectual innovation and R&D strategy will offer oil companies with several opportunities at the organizational level given that currently, governments are promoting environmental sustainability. Investing in R&D should be taken into considerations as it enables firms to continue operating in volatile markets marked by stiff rivalry and the rapidly increasing energy demand. Oil companies face numerous challenges with regards to mining and environmental regulations, as such; there is a need to conquer the challenges by adopting technological advancements with regards to geothermal and subsea mining technologies, which are regards as the greatest attainments in the industry. Moreover, innovation has enabled the use of software in producing accurate test results.

With the increment in the scarcity of conventional energy sources, investing in innovations becomes paramount in satisfying the energy needs of the world, reduction of climate change challenges and meeting the increasing demand for cleaner energy. Currently, regimes continue to prop up innovation and R&D using various tax incentives including tax credits, thereby enabling the flow of innovative developments from upstream sectors to midstream sectors. Operators within the upstream sectors will, therefore, concentrate on value harvesting from their innovations using increasingly effectual operation approaches while measuring the level of risks faced by the sector. Based on the above observations, on may conclude that investing in R&D and innovation will offer a quick ROI as the new technology will ensure that the oil company is able to maximize its output by meeting the increasing demand for oil and gas within a shorter period of time.

Why Investment in Innovation and R&D should not be undertaken

Innovation and R&D as a strategy has often been linked to increased risks including the cost of operations and unprecedented occurrence of disasters amongst others. Thus, the cost of operations associated with innovations in the oil and gas industry are always huge and might turn into losses in case the desired innovation is not realized or if the technology get into the hands of the competitors prior to its completion. Moreover, the process of developing and introducing new technologies has been associated with disaster in instances where a procedure has gone wrong. Within the oil and gas industry, the development and introduction of new innovations has often been associated with oil spills and destruction of the environment. Additionally, stiff competition within the industry also implies that players are also making efforts to develop innovative ways of oil extraction as well as operational efficiency. This implies that a new innovation in the industry is prone to be challenged by another advanced innovation within a shorter duration of time. As such, oil and gas companies that have taken on innovation and R&D as a key strategy might not realize their ROI in time. Based on the above reasons, innovation and R&D should not be taken as a key strategy in the market especially during this time when the industry is facing the challenge of low oil prices as it may lead to further losses.

A careful scrutiny of the price of gasoline discloses that the retail price can be broken down further into seller mark-up, crude oil cost and tax, reflecting a 20%, 50% and 30% of the retail fee correspondingly. The cost of crude oil forms the biggest percentage of the price while tax is comparatively stable. Consequently, the seller’s mark-up price is determined by the shifts in crude oil prices. Moreover, an in-depth scrutiny of crude supplies discloses that market perceptions coupled with economic incentives linked to OPEC’s crude supplies are divergent the non-OPEC supplies’. Over and above increasing the significance of real-time information, the energy market commoditization has diminished product cycle, added on to the price volatility of crude oil and narrowed the margins (Folio Investing, 2015). Such factors brought about by energy market commoditization have played a pivotal role with regards to the inter-fuel substitution decisions.

Why Investing in Reserves during Price Volatility as a Strategy should not be undertaken

Oil refiners hold the view that prospective price increments will imply increase in input costs that will be transferred to clients or else their revenues will reduce. As such, crude prices are prone to impact the crack spread of the refiners adversely. The crack spread refers to a risk/reward coefficient for commodities that are amassable into a compounded refinery margin. This has led to oil corporations proffering special-structure goods meant to satisfy the consumers’ needs. Nevertheless, an evaluation of the link between crude prices and product margin is vital for effectual execution. Moreover, the transportation and storage costs of natural gas at ambient temperatures is bound to increase as increased degrees of pressure are needed to keep it in its gaseous state.

Lastly, a debate on the effects of OPEC and non-OPEC crude prices behavior on the current price challenges facing the industry has been on-going. Such difference in crude price behaviors exhibited by the producers have, in effect, resulted in the conclusion that the world’s crude oil industry and market are not integrated given that importing nations have signed long-standing contracts securing their oil supplies.

Advantages of the Strategies

Optimum Energy Mix

• Allow oil companies to spread their investment risks while remaining competitive.

• Offer the organization not only other alternative sources of income but also a return on investment potential.

• Takes in conventional fuels and renewable energy portfolios is considered as a great means for the companies to potentially gain advantages from returns that surpasses a number of the market-founded investments.

Innovation and R&D

• Enables firms to maintain a competitive edge and attain profitability they have to continuously innovate.

• Enables firms to continue operating in volatile markets marked by stiff rivalry and the rapidly increasing energy demand.

• Enables the organization to face and overcome challenges linked to oil mining and environmental regulations as organizations develop technologies with minimal environmental impact.

• Enable the use of computer software in producing accurate test results.

Investing in Reserves during Price Volatility

• The ability to effectively transfer price increments to the end-users

• The strategy proffers the seller with the aptitude to sustain the revenue margins. For instance, increments in prices are passed down to the consumers and do not affect the profit margins.

REFERENCES

{1} Folio Investing. (2015, June 2). When Oil Prices Influence Market Sectors, Diversification Can Save Your Portfolio. Retrieved November 4th, 2016, from blog.folioinvesting.com: https://blog.folioinvesting.com/2015/06/02/when-oil-prices-influence-market-sectors-diversification-can-save-your-portfolio/

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