Structure And Organization Of The Petroleum Industry Economics Essay

Structure And Organization Of The Petroleum Industry Economics tasteFrom driving industries universe of discourse(a)ly to heat up our homes and fuelling our cars, embrocate plays a major role in our lives as consumers exclusively close people are yet to remove themselves how the labor that produces this anoint has evolved to what it is now. The petroleum industry has evolved oertime and the use of its products has excessively grown to become an essential part of todays global economy (Business and Economic search Advisor, 2006).The petroleum industry is involved in the global business of discovering oil, extracting it from the subsurface, refining it into a variety of useable products, distributing it through pipelines and oil tankers, and finally marketing it for human race use (Wikipedia, 2010). While some companies in the industry (integrated companies) perform all these functions, differents only perform one or some of them (independents) (Davies, 1999).The source of energy that currently provides most of the worlds energy demands as well as raw material that the petroleum and chemical industries refine into a variety of essential industrial and chemical products came with the development of the petroleum industry in the nineteenth and twentieth century. These products include amongst others fertilizers, pesticides, solvents, pharmaceuticals and plastics. Products derived from crude oil refining are grouped into throttle valveoline (motor spirit/fuel), heating oil, middle distillates (jet fuel, diesel for vehicles and other motor engines), kerosene for cooking and fuel oil (boiler fuel for industry, origin and shipping).According to the American Petroleum Institute, the industry is change integrity into sectors that cover all the procedures involved in finding, producing, processing, transporting and marketing oil and gas. These include upstream- involved in exploration and production of oil and gas using modernistic geology to high-tech offshore drilling platforms downstream- involved in refining and marketing. It also includes the transportation of products using tankers from local terminals to service stations and ownership and opearned run averagetions in retail outlets pipeline- involved in the movement of oil from ocean platforms and wells on land to refineries and finally to terminals where they are released to retail outlets marine- comprises all aspects of petroleum and its products movement by water, including port operations, maritime fighting and oil spill response service and supply- includes companies that provide supplies, services, design and engineering support for exploration, drilling, refining and other operations. forward to oil being commercially discovered and drilled in 1859 in Titusville, Pennsylvania, which saw the birth of the modern petroleum industry, lifelike petroleum served the primary conception of kerosene for lighting and heating. In the early twentieth century, the use of coal as the worlds primary energy source was eventually replaced by oil and as gasoline for the newly invented internal combustion engine (Jones, 2005). Oil and gas development has evolved overtime. Their use has also grown to become an essential part of todays global economy. As oil and gas powers todays economy, its availability and sustain was important in both world wars and it still remains the critical fuel source that powers industry and transportation (BERA, 2006).With oil being commercially available in the US, the first major oil company, the Standard Oil Company was formed by J.D Rockefeller in 1870 and United States became the worlds giant in oil production until the end of World War two when the Middle East countries took the lead.The post world war era witnessed the union of Anglo-Saxon companies called the septet Sisters as coined by Enrico Mattei, an Italian entrepreneur. They included four companies and three others ( Standard Oil Companies of New Jersey- Esso, New Yor k- SOCONY, and California- SOCAL) formed by the break-up of Standard Oil Company in 1911 by the U.S government when the Companys operations were declared monopolistic and infringing the Countrys unique antitrust law as of then (Jones, 2005). The Seven sisters were vertically integrated international companies according to Jones (2005) that arose because of the need to ensure efficient operations of the refineries to assure and manage oil flows, secure outlets for crude oil and congeal to short-run changes in the demand for different products in different areas. They were involved at all stages in the industry from exploration and production of crude oil to marketing the products to its final consumers. They also diversified into fertilizers, petrochemicals and other industries that utilized petroleum derivatives as raw materials.Except in North America and the communist countries, the sevensome sisters were responsible for 85% of gross crude oil production and 72% of refinery glob ally in the 1950s and they all made the list in the 1956 be of the worlds largest industrial firms by revenue (Jones, 2005).Intra-firm trades and the vertically integrated status of the multinationals had began to decline at the beginning of the 1950s as host governments policies to increase ownership and control over resources did not favour them. This was the period of nationalization with the majors, who had been strong players in the Middle East and other OPEC (Organization of Petroleum Exporting Countries) countries, being dealt massive blows by the nationalization of assets in the Middle East and other countries (Davies, 1999). From the late 1960s, this swerve led to the expropriation of foreign assets (nationalization without compensation) and the formation of national cartels intended to enhance the bargaining power of host countries against the seven sisters. A typical case was the formation of OPEC in 1960 by Iraq, Kuwait, Iran, Venezuela and Saudi Arabia. They were inv olved in product pricing and quota sharing but overtime their influence was no more successful than the seven sisters in price regulation in the long-run (Jones, 2005). The state owned national oil companies sprung up as a result of the nationalization during this period and foreign ownership of resources declined.Significant in the industrys development in the 70s and 80s was a change in the corporate structure of the industry and the policies of the host governments. New entrants emerged as the industry became more global in nature. Other world markets in Europe, Asia and Russia and began to play a much greater role and the seven sisters now had competitors. Amongst these were the U.S European State-owned oil companies the like ENI, Italys AGIP and Frances CFP. Others who joined the competition for concession and market were independents like the U.S Occidental, Getty Oil, Continental and Amerada. Their involvement, increase the bargaining power of producer governments, weakened the control of multinationals over world oil prices and made the industry highly competitive forcing the incumbent multinationals to diversify into other industries but this was hardly successful (Jones, 2005).Despite the extensive global changes in the technology, markets and geopolitics, the structure of the industry had remained fairly intact some few years past but in 1998/99 a period of corporate consolidation was introduced bring an abrupt end to this era of fair constancy (Davies,1999).From a serial publication of spinal fusions and acquisition between 1998 and 2002 in response to a severe deflation in oil prices was the emergence of the super majors in the industry. They included non-state owned companies like British Petroleum (BP), Total, ConocoPhilips, Royal Dutch Shell, ExxonMobil and Chevron. In an attempt to hedge against oil price volatility, improve economies of scale and quail large cash reserves through reinvestment, they began merging in the nineties. BP acquir ed Amoco in 1998. From a merger of Esso and Mobil, ExxonMobil arose in 1999. Total Fina Elf arose from the merger between Total, Petrofina and Elf Aquitaine in 2000. A merger of Chevron and Texaco in 2001 created Chevron Texaco and finally in 2002 Conoco Inc. and Philips Petroleum Company became ConocoPhilips (Wikipedia, 2010). In some cases, these mergers at the micro-level increased profit but they were insufficient at having a major impact upon corporate level returns and profitability (Davie, 1999).Presently, the only survivors of the seven sisters are BP, Shell, ExxonMobil and Chevron contributing only 10% of the worlds oil and gas production and they hold only 3% of reserves with the states from developing countries owning the remainder. This notwithstanding, their integrated nature pushes their revenue higher than those of the new entrants (Jones, 2005).An interesting development as describe by the financial times of March 11, 2007 is the existence of the new seven sisters. They have become the most influential state-owned companies controlling nearly a triad of the worlds oil and gas production. They include Gazprom (Russia), National Iranian Oil Company (Iran), Saudi Aramco (Saudi Arabia), Petroliam Nasional Berhad (Malaysia), China National Petroleum Company (CNPC), Petroleos de Venezuela, (Venezuela) and Petroleo Brasileiro, Brazil (Wikipedia, 2010).From current trend of events, the industry is still evolving and further change is anticipated by some factors discussed herein. Firstly, oil reserves ordain decline because of the increased demand for petroleum resources globally. This will prove the Peak oil theory propounded by M. Hubbert in 1965. Regrettably, this has been unsubstantiated because of the continuous oil finds being made in other parts of the world and technological advancement which has leave behinded old oilfields once thought as depleted to be produced.Secondly, exploring in some parts of the world where finds has been made will collect complex and cutting-edge technology making exploration difficult, expensive and highly risky. This may only favour the large companies as they will be fitted out(p) financially and technologically.Thirdly, the future petroleum industry will be increasingly competitive for oil prospect which may favour the super majors as they possess more technical know-how, finance and popularity. Nevertheless, the nationally-owned companies (NOCs) may be a strong match for them as they are supported by their state governments and also have the wherewithal to seek for concession.Fourthly, the wish of some countries to create their own oil companies and the concern about energy security is likely to increase resource patriotism in the near future. Unfortunately, this will be a minus for the super majors but a plus for the NOCs.As aftermaths of these possible future changes, thither are likely to be more mergers and acquisitions, drop in the quota contributed by the individually-owned multi nationals, shift of investment from petroleum to alternative energy forms and complete diversification of the majors from production to become companies servicing the NOCs.In conclusion, the petroleum industry plays a vital role in driving worldwide economy because its resources are considered amongst the worlds most important. This importance attached to petroleum would be reduced if the world diversified to alternative energy forms, some of which are renewable. This will not only reduce the influence of the industrys giant but it will also prolong the life of petroleum reserves, encourage the use of alternative energy such as natural gas, wind and nuclear power, and make our environments safe by reducing air pollution, global warming, acid rain and other environmental issues.Despite participation by the NOCs in international oil markets, the industrys boundaries have widened. There are potentials for the majors to improve their profitability but they will not have the unique advan tages that could allow them dominate the industry (Davies, 1999).From the popular saying, change is the only constant thing in nature, the petroleum industry has had its fair share of structural and organizational changes over the past years, which has resulted in the industry having the state-owned companies, five supermajors, over a dozen large independents (e.g Amerada Hess, Marathon etc) and small independents (e.g Anadarko, Talisman, Lasco, British Borneo etc) and the specialist firms (e.g Schlumberger, Weatherford, Halliburton etc) as its current structure.