Challenges Faced by Big Oil Companies

Question: Discuss the challenges faced by big oil companies. Answer: Introduction: We use oil in our day to day life. Oil has become the essential part of every ones life. The oil fuels are widely used in Cars, trucks, buses etc. When we talk about energy we often draw a picture of oil companies in our mind. At the first glance it can be thought that the future of the various western oil companies like BP, Royal Dutch shell, ExxonMobil and Chevron is very bright these companies are collectively known as Big Oil. It has been observed that the prices of oil have been rising at a tremendous pace since the past decade and is expected to increase at $100 per barrel. Though the commodity prices of the oil are quite high still there are many serious threats which are being faced by the Big Oil Companies and these problems or the challenges can constrain the earning power, share price performance and the ability to grow the dividend of the company in the long run. The energy growth is not the same as it was some time back and it seems that the margins in the near future ar e going to be smaller and smaller.(Faulkner (2014)) There are variety of challenges that are being faced by the oil companies which includes decreased access to sovereign reserves, challenges related to innovation, increase in the regulations and various new energy policies. These challenges bring with them the threat to this industry. When we talk about sustainability for these companies it is no longer a factor which differentiates it from the other companies. (Singh (2010))The challenges that the industry is facing currently automatically necessitate being serious about sustainability and managing the technology strategies properly. The Big oil companies whether it be at national level or at international level are facing various challenges which are posing danger on the survival of these companies. Some of the challenges that are faced by the Big Oil companies include the following: Demand Growth has slowed It has been observed that the rate of growth of the company has slowed down since the past decade even though the consumption of the oil is up over the last year. The main reason for this is the decline in the demand of oil in the countries like Europe and US. The main reasons for the declining demand can be recession in the developing countries the biggest driver are the increased fuel efficiency and high prices of gas. (Mieczkowski (2005))Due to the stagnation of the global economic the demands of these companies have slowed down a lot. Oil is getting more expensive to recover as the world is not having any shortage of oil but the truth is the world is having the shortage of cheap oil. The ultra deep water locations have accounted half the reserves of oil in the current years and the in US oil drilling has become hot.(Hoium (2013)) According to the latest researches it has been analyised that the oil can be found easily but the researchers are required to start stretching their technology and researches. Now days the consumers have become very price sensitive that now the cost of the gasoline is more than $3 per gallon. The consumers find various alternatives to be attractive which can be a long-term concern for the industry.(Moore (2015)) Alternatives are closing in quickly as there are various alternatives which are becoming popular as the time is passing and the technology is changing. There are various electric motors from the companies like Ford, Nissan and Tesla motors which are becoming popular as compared to the conventional gasoline vehicles and are getting better as the technology keeps on improving. Natural gas is offset by the solar energy as a new power generation source and as the costs will fall in the near future it will continue to grow all over the world. The Big oil is impacted by the clean energy revolution.(Al-Zayer. (2007)) Slowing the growth of production The main challenge that is being faced by the big oil companies is the slow growth of production. There has been a dramatic decline in the production of the various big oil companies due to various supply sources. It was said by the ExxonMobil in the year 2014 second quarter that the production sank to 5.7% year after year and it was lowest in the year 2009. The production growth forecasts of many big oil companies have been lowered and are guided roughly say 1%-3% annual growth. (Robbinson (2014))Chevron has the best prospect of delivering 4% annual growth through the year 2017 and it has its main focus on the higher-growth regions which includes Gulf of Mexico and onshore US Shale. The cost of production is high and is rising as the time is changing which is the biggest challenge for the big oil companies. The reserves of easy oil has depleted so the big oil companies have started venturing in to remote and uncharted territories around the world. The average break even costs are higher in the areas of deep water regions.(Crowe (2013)) Climate change One of the most controversial challenges that are being faced by the big oil companies is the cost of complying with the new regulations that are aimed for limiting the climate change. Limiting the global temperature by 2 degree Celsius before the year 2050 was generally accepted so that potentially catastrophic damage can be avoided on the environment of the earth. In order to achieve this goal green house gas emissions are required to be curtailed by burning the natural gas, oil and coal. (Marcel (2007))According to the reports it has been found that a large amount of reserves that are owned by the Big Oil companies cannot be burned which renders them useful which simultaneously makes it quite difficult to achieve the goal of achieving the (Nimos n.d.) temperature to 2 degree Celsius. If this happens then it might be possible that these companies require writing down the value of their reserves which would obviously slash the market value of the Big Oil companies and the share prices will also be affected drastically. Cost of Services is another challenge that is being faced by the oil and gas industry which cuts across the value chains from the exploration to the production along with the refining and transportation, which results in increase of the commodity prices and the industry, is automatically driven to the level where it has become difficult for it to respond.(Lieberman Rust (2015)) Crude supply mechanism are many problems faced in the supply of the crude oil this greatly affects the supply chain as the accurate information will be affected. (Martin (2009))There is a much need of information technology to overcome this issue and discover the various alternative sources. The companies can collect various data which can become basis for its decision making. The cash crunch of sub-$50/bbl oil on projects and dividends: There has been a struggle by the biggest oil companies so that they can generate enough cash for covering their dividends and spending. The four well known oil companies that is the Royal Dutch, BP plc , Exxon Mobil Corp, and Chevron have been spending on new projects , dividends and share buybacks and they outstripped the cash flow to more then $20 billion during the half of 2015. Over 28% was handed over by the company to the shareholders. (Kent (2015))The current prices of the oil are being traded above $40 per barrel which is their lowest levels since August and many companies are not seeing the prices to be rising above $60 barrel until 2017. Oil and gas industry should prepare for low-carbon energy transition: By looking back towards the current problems that are faced by the big oil companies which are caused by low commodity prices. According to the reports it is argued that the oil companies are a vital part of future energy system as there is a demand by the global consumer for affordable and reliable energy supplies. It is known that the global demand for reliable energy will continue to grow in the coming future. According to the reports it is suggested that the oil and gas companies should take measures that might affect their future trends.(Cudff (2016)) It is also suggested by PwC that the government shall implement COP21 regulation, direct investments, and incentives and there will be rise in renewable energy which will put pressure on the big oil companies to diversify their business. Implementation of change: The Big oil companies have changed their concept of looking at the fuel and energy related subjects. Various new technologies and services have been developed by the companies so that they can easily meet the needs of the consumers. (Butler (2016))The companies are now going to be more productive, innovative and efficient in managing their tasks. In relation to the consumer level which is considered as the main source of income for these companies are likely to be more satisfied in meeting the demands. It is expected that the oil demand will rise up to say around 36.5% of the world energy by the year 2030 or say about 120 mbpd according to the latest scenario of OPEC. The gas share is expected to climb of over 27% by the year 2030. It is expected that most of the energy will be consumed by the industrialized countries while the bulk demand will come from the Asian developing countries like from the booming economies and from India and China which accounts for approximately 86% of the global demand. Another challenge that is being faced by the Big Oil companies is the rising costs of the projects as for example there is increase in the drilling cost by 5% since 2003. These rising costs are also due to the problem of shortages of labor. Due to which the wages have increased by about 15% in the year 2005. Measures are being taken by the OPEC member countries and the NOC so that the shortage in the developing programs can be reduced that will further facilitate the engineering expertise developments. Another challenge that is being faced in the uncertainty in the demand so the industry understands the fact that comprehensive approach is required in this industry. In order to deal with the challenge of the sources of the crude oil the big oil companies can devise avenues and alternative means for the exploration of the oil. For saving the worlds oil and Gas it is required to devise the alternatives.(Houston. (2013)) It was suggested by the global analyst that the decision of OPEC for not cutting the production at the meeting held by OPEC in the November 2014. The costs of the Big Oil companies is already being trimmed for example ConocoPhillips announced recently that it is going to slash its spending on the investment by 20% in the coming year and Halliburton which is the second largest oil field company of the world announced lay-offs. It has been further concluded by the IEA that the shale oil from Bakken formation will be profitable at just $42 per barrel. There is a lot of pressure on the oil companies as the net income of different oil companies keep on declining but the consumption of the oil will continue to fall in the developed countries while the alternative fuels will grow.(Hoium (2013)) Conclusion: The performance of the big oil is already been hurt there has been a net income decline of the various famous big oil companies like BP, ExxonMobil, Royal Dutch Shell and Chevron as depicted in the figure above. Here it can be concluded that though Big Oil companies are well known for their monster profits but the challenges that are being faced by them can also not be neglected. The rising and high development costs, slow production growth and the curb of increasing global warming are the biggest threats that are being faced by these companies. The Investors who are cautious will be wise in taking the decisions while investing in these companies. The Big Oil companies reign is coming to an end and moreover there is not much growth left for the investors even. It is estimated that in the near future the companies are going to lose their revenues and earnings and the stocks are also going to fall. The big oil companies can take various steps to overcome the challenges that they are fa cing due to the climate change and can come out of this danger. Taking timely measures and proper research on various threats and opportunities available for the industry can prove out to be very beneficial for the Big Oil companies. To overcome the issues related to the stagnating crude oil it is very important to maintain effective operation and also ensure that proper margin is obtained in the market. There shall be reliable instrumentation and trusted technologies for example the robotic system this will help in boosting the refining of the crude oil. Bibliography Al-Zayer., F (2007), 'The future of oil and gas and the resultant challenges and opportunities for NOCs', Organisation of the Petroleum Exporting Countries. Butler, N (2016), 'Oil companies need to tailor strategies to claw back lost profits', A supply that is plentiful demands some fresh ideas from the industry, 4 Febuaray (2016), pp. https://next.ft.com/content/bb1dd29e-cb2b-11e5-a8ef-ea66e967dd44. 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