Corporate Takeovers in the US Oil and Gas Sector

Questions: 1. Shortage of funds of sub-$50/bbl in the context of projects and dividends?2. Abolishing production-maximizing policies?3. Procedures that can be adopted to achieve a low carbon global world? Answers: Introduction The following essay evaluates the global market conditions in the oil and gas industry, emphasizing on Big Oil companies. The Big Oil consists of major international oil companies, which are spread globally. These oil entities are the world leaders in oil and gas sectors in the country. It is currently is facing an economic meltdown with decreasing oil prices, lack of fossil fuels and harmful carbon emissions degrading the environment. However, big oil entities needs to continuously pay dividends to the investors, to seek their support in building the environment. On the other hand, Ahmad (2014) stated that big oil companies needs to re-consider its maximum production capacities, which are leading to global warming. Big oil companies are facing severe lack of funds with several brands delaying its projects. Production costs have been cut down, with a huge drop in total earnings from the last year. In its effort to rectify the situation, the brand has shifted to production that makes lesser use of carbon. Big Oil is facing several obstacles in its path, and its survival depends on adapting to changing circumstances in the oil and gas sector. 1. Shortage of funds of sub-$50/bbl in the context of projects and dividends Ju, et al. (2015) opined that the collective earnings of four of the biggest oil companies Royal Dutch shell PLC, Exxon Mobil Corp, BP PLC, Chevron Corp; collective earnings have decreased by 70% from the previous year. However, in the same period, big oil companies have paid almost $28 billion as dividends to their shareholders. Wilson and VanBriesen (2012) argued that this was at least 10% increase from the previous period. It is estimated, that the dividends to be paid would be consistent, and not unpredictable like the oil prices. The total collective earnings of prominent oil companies- Royal Dutch ShellPLC,Exxon MobilCorp.,ChevronCorp.andBPPLC have fallen by 70% in the current financial year (Aloui et al. 2014). Oil prices are currently valued above $40 a barrel. According to Handfield et al. (2015), this is the lowest price since August, the last year. As such, there has been a shortage of funds at Big Oil companies. These entities believe that they have a strong financial condition, which would provide them with additional funds as and when required. Oil majors believe they have to pay regular dividends to avail investors. However, this can be harmful in the long run, and can affect the cash position of the companies. The worlds biggest oil companies are striving hard to achieve enough income to balance operational costs and dividends. Wilson and VanBriesen (2012) argued that this shortfall in funds reflects the existing state of Big Oil companies like Exxon, Shell and Chevron. The decreasing prices of oil have been a regular feature in the last 16 months. Major oil companies have reduced production costs by $30 million in the recent months, and have initiated the laying off process of employees. In addition, this has resulted in projects being delayed, with more cuts expected. As per investment bank Oppenheimer and Co, energy investor must now plan differently, due the depleted state of the existing oil companies. On the contrary, Davies et al. (2014) mentioned that decreasing production expenses could negatively influence the production capacity of Big Oil Entities. In an effort to implement cost cuts, four major BIG oil entities have postponed production of about 7.3 billions of natural gas and other liquid resources. It is the believe at Big Oil that to achieve business sustainability, operational expenditures need to be reduced than cutting down on payment of dividends. Murray (2013) has stated that without m reducing dividends by a substantial percentage would discourage investors from investing. In addition, this would not reflect well on brand reputation and goodwill of Big Oil companies in the market. Exxxons dividend has a growth rate of 6.4% per year in the last 33 years (Stackhouse and Stewart 2016). Chevron, Shell and BP have made dividends payments a priority irrespective of the market condition. The prominent energy companies emphasize on payment of dividend to investors, without considering reduced profits followed by a decreasing oil prices. Italian oil and gas entity Eni Spa has been the only exception, by reducing dividend payments by 30%, when compared to the last year (Chong et al. 2014, p. 015). 2. Abolishing production-maximizing policies According to Pedroni et al. (2013), a large portion of oil in the Middle East, coal in Australia, US and China and other fossils would have to reserved, to avoid dangerous climate change. As such, it becomes necessary to retain temperature to about the permissible 2C safety limit or below. As per the recent research published in the Journal nature, the facts and figures relating to unused fossil fuels and its locations have been stated, to prevent any dramatic changes in climate. The research work has implemented established economic models to predict that effective climate strategies would adopt cheapest fossil fuels in its production process. Using expensive fuels priced highly, which would emit carbon within the permissible limits, is also an option for manufacturing entities, which require a large amount of fossil fuel. However, Kelland (2014) mentioned that technology to remove carbon emissions have not beneficial to the global climate in general. Besides this, the technology has made no impact in retaining unused natural gas and coal. Prominent fossil fuel entities like Lukoil, Exxon Mobil, BP, Gazprom and Chevron have large oil and gas reserves (Fidler 2013). If they continue with a production maximizing policy, these natural reserves would be depleted within a short period. Coal is considered as the most harmful pollutant of all fossil fuels. As such, 82% of global coal reserves must be left untouched, to deal with global warming and climate change (Handfield et al. 2015). In countries like Australia, US and Russia all most 90% of the coal reserves have to be left unused to retain healthy climatic conditions. As per Palmer (2013) in the case of natural gas, 50 % of the global reserves should not be burned. However, important gas producers in the Russia and Middle East have to leave substantial portion underground to achieve healthy weather conditions in these places. Moreover, Europe and the United States can use almost 90% of the gas reserves, to replace coal and provide power to local entities. Fidler (2013) mentioned that only a one-third of the global oil reserves must be left untouched. As such using if oil resources would not posses any major threat to the weather conditions. However, Pribadi et al. (2014) stated that the Middle East is required t o leave almost 260bn barrels of oil in the underground, to maintain environmental balance in the region. Despite of the danger towards environmental degradation, large amount of investments are made to explore newer sources of oil and gas reserves (Stern 2014). In the previous year, fossil fuel entities incurred expenditure to the amount of $67o bn on finding better oil and gas resources (Fidler 2013). The trend relating to finding better resources of fossil fuels can be extremely harmful to the environment. In addition, experts at Big Oil feel that unconventional fossil fuel like Canadas Tar cannot be used, and should be left in the ground (Cox et al. 2016). Financial expert at Bank of England and Goldman Sachs believes that there is an inherent risk in expensive fossil fuel projects, since they are likely to incur losses due to adverse climatic changes. Kelland (2014) highlight the contradictions in government actions in different countries. This relates to implementing measures to maximize fossil fuel production, as well taking an active part in limiting global warming. 3. Procedures that can be adopted to achieve a low carbon global world The following are the plans made by oil companies to adjust to a low-carbon global world. Using natural gas Murray (2013) asserted that fossil fuels would constitute around 50 % of the global energy sources, in the current year. As such, using natural resources would produce very less carbon dioxide than in coal. Carbon dioxide being a harmful air pollutant can cause considerable damage to the atmosphere, and to the business sustainability of major oil companies (Ahmad 2014). As such, experts believe that natural gas can play a prominent role in reducing carbon dioxide in the air. Thus, Big Oil companies can adopt this approach in preservation of natural gas and utilizing it, without any wastage remains an important concern for big oil companies. Emissions from global supply chain Mitchell and Mitchell (2014) stated that due to the presence of methane, a strategic plan must be implemented to reduce methane emission form the manufacturing process. As such, required measures would assist to not only curb carbon dioxide levels, but also setting stricter methane emission goals. As per the sustainable gas institute, methane emission remains a primary concern, in reducing carbon monoxide levels in the air. Utilization of advanced technology mechanisms can reduce emission of methane largely. The necessary awareness to climate risk Business models must consider preservation of natural resources, in developing a successful business model. Oil entities need to be innovative and emit less amount of carbon dioxide as possible. Implementing a carbon-free production process would assist Big Oil to negate any harm to the social and environmental aspects in the community. In the global market scenario, the brands operating in the oil and gas industry would have to strictly monitor their business operational policies to prevent any damage to environment. Commercial Energy Handfield et al. (2015) mentioned that oil and gas companies could diversify into producing renewable energy. Big oil companies have begun investing into renewable energy by using wind power at the sea. As such, it becomes essential that oil and gas companies look for other means to production of energy. Innovation and investment in research and development is essential to the development of alternative means in developing commercial energy in the country. Huge carbon cost According to Mitchell and Mitchell (2014), a number of large business groups like BG group, BP, Statoli in the recent times introduced the global carbon price. Global carbon price is the standard cost of carbon determined by the major oil companies in the world. In this manner, use of carbon would be less in the production process. Big Oil companies can decide on a pre- settled price, so that buyers would be forced to look into other means of production. Carbon storage Fidler (2013) opined that Carbon storage techniques have evolved in the modern age, due to the wastage of oil and gas resources in the country. Big oil is using the technique of carbon capture and storage to deal with greenhouse gas emissions. Cox and Ng (2016) mentioned that this would guard against 75-90% of carbon dioxide generated from a power plant from entering the atmosphere. In the current times, CSS power projects have been a relevant part in the effort to reduce carbon emission. Last year, the first large scale power sector CSR project became operational in Canada Recommendations - The following recommendation can be made to assist Big Oil in recovering from the present situation Costeffective production- The brand can use cost effective production measures to offer quality products at reasonable price to corporate clients. As such adopting harsh production measures can further lead to global warming and environmental degradation. Hence, this would not help the firm to achieve business sustainability or corporate reputation and goodwill of the firm. Besides this, delaying business projects due to a lesser production budget would hamper the growth prospects of the brand in the end. Thus, the brand needs to change its production process from cost-cutting strategy to a cost effective strategy. Alteration in business policies- Big Oil can modify is production strategies, to avoid incurring unnecessary expenditure. The aggressive production policy adopted by these major oil entities cannot be reasonable, where prices of fuels has been decreasing at an alarming rate Conclusion It can be stated that Big Oil is currently in a continuous path of decline and is facing severe business crisis. Its lack of profitability in recent times, have contributed towards its downfall. However, the brand has implemented towards shifting to low priced non-carbon production procedures that can reduce production costs and carbon emissions in oil and natural gas productions. Besides this, the brands have adopted latest storage procedures to address issues in its production process. Through this, Big Oil feels that this would enable the brand to adapt to changing market conditions in the market. Industry experts believe that the Big Oils business strategy of maximum production has been adversely harming the environment and business prospects of Big Oil in the global market. Big Oil brand pay regular dividends to investors. As such, they have to make a balance between paying dividends and keeping surplus funds in times of crisis. Big oil needs to be proactive and implement strong measures in such a volatile market environment. References Ahmad, A., 2014.Examining risk behavior and risk management practices in oil and gas construction industry(Doctoral dissertation, Universiti Teknologi Malaysia, Faculty of Management). Aloui, R., Assa, M.S.B., Hammoudeh, S. and Nguyen, D.K., 2014. Dependence and extreme dependence of crude oil and natural gas prices with applications to risk management.Energy Economics,42, pp.332-342. 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