The Oil And Gas Industry

The Oil And Gas Industry Des Plc, one of the largest and world leading drilling companies in the oil and gas sector of Germany. The company was established by Engr. Joe and Mr. Onos in the year 2004 when the German government initiated the Integrated Energy and Climate Programme (IEKP) policy aimed at providing state-of-the-art, secure and climate compatible supply of energy in Germany in order to restrict dependency on imported oil and gas products. Driven by the need to expand, Des Plc has decided to embark on business operations in Nigeria. The aim of this report is to, as a researcher, advise the CEO of Des Plc as to whether DES Plc should export or go into foreign direct investment (FDI), as its approach in Nigeria. This feasibility study tends to explore and look into the analysis of the national business system and cultural conditions prevalent in Nigeria and Germany while assessing the pattern and trends of trade and investment in both countries within the Oil and gas sector with key emphasis on protection measures against imports and foreign investment in Nigerian oil and gas sector; advise on whether Des Plc should export or go into foreign direct investment, or combine the methods, considering the effect of the exchange rate regime for Germany and Nigeria. And, on the whole, it assesses the level of risk exposure and corporate social responsibility (CSR) issues Des Plc of Germany may encounter in Nigeria as a foreign counterpart in the Nigerian Oil and gas industry. By the end of this research, the best strategy will have been established for adoption taking into cognizance the recommended approach considered optimal 1.1 THE OIL AND GAS INDUSTRY The oil and gas industry is one of the largest and fastest growing industries in the world today. Oil and natural gas products touch our lives in countless ways every day. Together, they account for more than 60 percent of our nations energy. They fuel our cars, heat our homes and cook our food (EAPI, 2011). It may also be worthwhile to add that Nigeria is the 10th largest oil producer in the world, the third largest in Africa and the most prolific oil producer in Sub-Saharan Africa. And while the Nigerian economy is largely dependent on its oil sector which supplies 95% of its foreign exchange earnings, the German government is trying to lower the level of dependency on the importation of the product (MIS, 2011). 2.0 AN ANALYSIS OF THE NATIONAL BUSINESS SYSTEM AND CULTURAL CONDITIONS 2.1 NATIONAL BUSINESS SYSTEM The national business system approach explains international differences in firm organisation and firm behaviour. The focus is on the coordination of economic activities and on governance issues. National differences in the organisation of firms and markets are explained by differences in culture and in formal institutions. The business systems approach, while originally rooted in sociology, increasingly has become based on economic theory with slight emphasis on legal, political and educational frameworks (Lundvall 1999). Owing to the implication of the preceding analysis, an emphasis is placed on the following institutional arrangements in the Nigerian political, economic and legal system with the analysis of the national business system in Nigeria in connection with Des Plc of Germany as a prospective entrant to the Nigerian business space- as shown in the table below: DIMENSIONS BRIEF OVERVIEW POLITICAL SYSTEM IMPACT ON BUSINESS The Federal Republic of Nigeria is governed in accordance with the provisions of a Constitution. The most recent came into being in May 1999.The new Constitution is based essentially on the report of a Committee which had collated the views expressed by Nigerians in the 1995 constitution. Significantly, the Constitution affirms that Nigeria is one indivisible and indissoluble sovereign state, whose constituent units are bound together by a Federal arrangement. It provides for a presidential system of government in which there is an Executive, a Legislature and a Judiciary, with each acting as a check and balance on the powers of the other two arms. The Constitution further provides for the operation of three tiers of government, at the Federal, State and Local levels. These provisions are binding on all authorities and persons throughout the Federation. This akin to the German political structure in terms of power distribution (TBTIG 2011). However, this democratic system of government has made the business space so unstable for some years owing to election irregularities and political manoeuvres. TERRORISM AND NIGERIAS DEVELOPMENT THE GOVERNMENT AND BUSINESS ACTORS IN THE OIL AND GAS SECTOR Terrorism has been on the increase since 2002 when a sect called Boko Haram started signalling disintegration of the Nigerian economy. Under past leadership, the group demanded that Nigeria become an Islamic state but it is now believed to be made up of several factions, with various demands which distort the political future of the nation (BBC Africa) The Nigerian government has embarked on robust policies to privatise its sectors in the recent years and as such, has boost efforts to attract foreign investment (TBTIG 2011). SHELL, TOTAL, CHEVRON are some of the key players in the oil and gas industry of Nigeria. They all have to thrive in the face of ethnic disparities because their major operations are in the remote areas of the notable Niger Delta region where militancy- oppositions are prominent. In 2004, Niger Delta activists demanding a greater share of oil income for locals began a campaign of violence against the oil infrastructure, threatening Nigerias most important economic lifeline (BBC Africa). DIMENSIONS BRIEF OVERVIEW ECONOMIC SYSTEM IMPACT ON BUSINESS Nigeria is the most populous country in Africa, with an ethnically and religiously diverse population of 140 million. Nigeria has the second-highest GDP in Africa (US$166.78 billion in 2007), reflecting the countrys substantial oil reserves. However, oil has proved a mixed blessing for the country (CIA 2011). Nigerias economy has much in common with those of China, Brazil, Germany, Malaysia and India; free enterprise is the norm. However, electricity and water continue to be partially government owned and controlled. Outside of transportation and, perhaps, a small section of the industrial sector, the petroleum economy has very little linkage with Nigerian production (Daudu) The Nigerian government has a policy which is to promote the commercialization, restructuring and privatization of certain government-owned enterprises. Privatization has also been accompanied by deregulation of various economic sectors to encourage private sector participation, notably in telecommunications, power, and downstream petroleum sectors. Most of Nigerias economic activity occurs in key metropolitan areas-Lagos, Abuja, Kano, Kaduna, Onitsha and Port Harcourt (online). Although petroleum continues to dominate the public finances and foreign exchange resources of Nigeria, the sector is, in reality, an enclave economy employing less than 100,000 Nigerians directly in production. The Nigerian government is restructuring and diversifying the economic base of the economy and reducing the dependence on oil, and as such will have bearing on the industry prominence and strategic posture. ECONOMIC PERFORMANCE OVER 12 MONTHS FOREIGN RESERVE SIGNIFICANT RATES The strongest performance of Nigerias non-oil economy allowed the economy to avoid a substantial slowdown in 2009 and it expanded by 4.9%, compared to the growth rate seen in 2008. In April 2010, the International Monetary Fund (IMF) forecasted growth rate of 7% and 7.3% for Nigeria in 2010 and 2011 respectively and said that the economy was recovering faster than it had earlier anticipated. These forecasts are predicted on the belief that oil prices will remain relatively stable as the global economy recovers, and on the assumption that the truce with militants in the Niger Delta holds. Attacks by militants on oil infrastructure and kidnappings of oil workers cut exports sharply in previous years (CIA 2011). Nigerias foreign exchange reserves had fallen to US$40.67 billion at the end of March 2010, down from US$42.4 billion at the end of 2009, and from US$52.7 billion at the of 2008. Nigeria disbursed about US$3 billion from its oil windfall savings to the three tiers of government in February and March 2010, which contributed to the depletion of its foreign exchange reserves. Interest rate: 6% (Central bank, April 2010) GDP growth: 4.9% (official, 2009) Unemployment: 4.9% (2007 est.) FDI: US$71.59 billion (December 31, 2009, est) Nigerias economic decline, especially during the last 20 years is illustrated by the fact that per capita income, which was the US $1000 in 1965 had declined to the US $300 by 1998. Within some 18 years, Nigeria had declined from being a low middle-income country and amongst the fifty richest countries in the world to one of the 30 poorest (Daniel 2011). LEGAL SYSTEM Nigerias legal system is based on English common law, Islamic Shariah law (in 12 northern states), and traditional law 2.2CULTURAL CONDITIONS Business is an integral part of society and both influence each other. Social-cultural environment refers to the influence exercised by certain social and cultural factors which are beyond the control of the business unit. Such factors include: attitude to work, family system, religion, languages, habits, preferences, tradition, value system, business ethics etc. Any change in cultural factors like education affects the lifestyle and thinking of the people living in society and thereby bearing on business activities in such society (Jain et al 2009). Managing the problems created by cross -cultural differences increases the transaction costs of conducting international business activities. Consequently, if cultural differences between potential trading partners are large, the economic and/ or strategic benefits of engaging in business activities must be large enough to offset the extra costs of doing business with difference cultures (McDonald and Burton 2002). However, putting the importance of cultural implications in the business space into consideration, planning to do business in the Nigerian oil and gas industry will require a look into some cultural factors as follows: Traditions and family system: Oil and gas operations are prominent in the Niger-Delta region of the country as the major oil wells are found in such rural areas of the region. Chevron is the third-largest oil producer in Nigeria and one of its largest investors, spending more than $3 billion annually. Chevron as a core player in the industry enters into serious business negotiations with traditional institutions in host communities before the commencement of oil explorations (Chevron 2011) Religion: Nigeria has Christianity and Islam as major religions major religions. However, these religions have little or no effect on the consumption of oil and gas products in the country. Ethnic Groups: Nigeria as Africas most populous country, is composed of more than 250 ethnic groups; the following are the most populous and politically influential: Hausa and Fulani 29%, Yoruba 21%, Igbo (Ibo) 18%, Ijaw 10%, Kanuri 4%, Ibibio 3.5%, Tiv 2.5% (CIA 2011). Language: English is the official language in Nigeria. The country is composed of diverse ethnic groups with several languages but three major languages (Hausa, Ibo and Yoruba) are spoken in a general sense. Although, the Pidgin English is prominently used across the nation because it remains the best way in which the uneducated ones communicate. This may constitute a major implication for Des Plc because German is the official language in Germany. So many stakeholders in the Nigerian oil and gas host communities do understand just the Pidgin English. 3.0 TRADE PATTERN BETWEEN THE TWO COUNTRIES 3.1 TRADE PATTER IN GERMANY Germany is one of the constituents of the European Union (EU) and also a member of the WTO. The WTO has a single trade policy and tends to demonstrate the possibility of exploiting the Collective nature of the communitys membership in order to maximize the political pressures brought about by WTO approached sanctions exists and has been noticed the communities trading patterns. However, the ultimate Machiavellian approach might be to target precisely those members states that do not benefit from WTO-incompatible measure of the community and are in favour of removing or amending it (Borght 2007). Developments in Germanys trade patterns in recent years have generally been conducive to the international use of the Deutsche mark on several accounts. First, Germany has become the worlds largest supplier of exports to the world, surpassing the USA since 1986 and enhancing the potential role of the mark as an invoicing vehicle. The bulk of German imports were raw materials particularly oil and gas from Russia and the bulk of German export were manufactured goods. Second, between 1986 and 1989 the share of specialized manufactured goods (primarily machinery and transport goods) in relation to total exports rose from 38 to 47 percent (ECB 2011). 3.2 TRADE PATTERN IN NIGERIA Nigeria has always reinforced commitment to improving her business environment so as to integrate into the global economy. However, oil and gas have been Nigerias bulk of export (Iwela 2007). The United States is Nigerias largest trading partner after the United Kingdom. Nigeria supplies around 11% of US oil imports and 4.5% of German Imports. Crude Oil and liquefied natural gas (LNG) account for 98% of exports and around 80% of government revenue (Qfinance 2011). 3.3 THE PATTERN OF TRADE BETWEEN GERMANY AND NIGERIA Nigeria and Germany have maintained a consistent trade relationship over the years. Meanwhile, recent trade statistics (2007) showed that Nigerias export to Germany amounted to 911,5 million Euro, a decrease of 35% compared to 2006. Imports to Germany have increased by 10% to 1083,3 million Euro. In 2006, the trade figure was in favour of Nigeria, with exports to Germany amounting to 1402,6 million Euro and imports from Germany worth 973,9 million Euro. The different trade figure is mainly due to lower oil exports to Germany and higher imports of semi-finished goods (Abah 2011). 3.4 TRADE IN THE OIL AND GAS INDUSTRY BETWEEN NIGERIA AND GERMANY Britain was the chief beneficiary of Nigerian oil in the early years of the colonys oil industry. After gaining independence, Nigeria expanded its export to destinations to include Western European nations, especially Germany and the United States (Levi 2004) However, the Germanys presence in the Nigerian oil and gas sector has declined over the years. Just as earlier stated that in 2006, the trade figure was in favour of Nigeria, with exports to Germany amounting to 1402.6 million Euro and imports from Germany worth 973.9 million Euro. The different trade figure for 2007 is mainly due to lower oil exports to Germany. 3.5 RESTRICTIONS AND PROTECTIONS ON TRADE IN NIGERIAN For two decades prior to economic reforms, Nigerias trade regime was viewed as complex, restrictive, and opaque (WTO, 2005). Following the structural adjustment programme (SAP) in 1988, a seven-year tariff schedule was adopted which significantly reduced tariff averages. However, further tariff revisions were made, often in response to pressures from domestic lobbies. Since 1978, the government had also introduced policies on import prohibitions which banned selected products that were viewed as strategic for the economy or which needed infant industry protection. However, prior to the recent economic reform, Nigeria maintained a complex tariff structure consist of about 19 bands and 5,146 lines (at the HS-8 digital level), with tariff ranging between 2.5 and 150 percent. Nigeria liberalized its import tariff regime by adopting the Common External Tariff (CET) of the Economic Community of West African States (ECOWAS) (Iwela 2007). 3.6 RESTRICTIONS IN THE NIGERIAN OIL AND GAS INDUSTRY Oil and gas operations commenced in Nigeria effectively in 1956, with the first commercial find in that year by the then Shell DArcy. Before this time, that is, from November 1938, almost the entire country was covered by a concession granted to the company to explore for petroleum resources. This dominant role of Shell in the Nigerian oil industry continued for many years, until Nigerias membership of the Organisation of Petroleum Exporting Countries (OPEC) in 1971, after which the country began to take a firmer control of its oil and gas resources, in line with the practice of the other members of OPEC. This period witnessed the emergence of National Oil Companies (NOCs) across OPEC member countries, with the sole objective of monitoring the stake of the oil-producing countries in the exploitation of the resource. Whereas in some OPEC member countries the NOCs took direct control of production operations, in Nigeria, the Multinational Oil Companies (MNOCs) were allowed to continue with such operations under Joint Operating Agreements (JOA) which clearly specified the respective stakes of the companies and the Government of Nigeria in the ventures (Iwela 2007). 4.0 EXCHANGE RATE REGIME IN GERMANY AND NIGERIA Numerous exchange rate regimes are practised globally, ranging from the extreme case of fixed exchange rate system, such as the currency boards and unions to a freely floating regime. In practice, countries tend to adopt an amalgam of regimes such as an adjustable peg, crawling peg, target zone/crawling bands, and managed float, whichever suit their peculiar economic conditions. (McDonald and Burton 2011). The exchange rate regime of Germany and Nigeria are considered as both countries use different currencies (naira and euro) respectively. 4.1 EXCHANGE RATE REGIME IN NIGERIA Nigeria has switched between exchange rate systems over the years. During the first phase (1970-1985), Nigeria operated a controlled exchange rate regime where exchange rate of the naira was pegged to the dollar. The second phase of exchange rate history in Nigeria began in 1986. Following the oil glut of the early 80s, it became clear that Nigerian economy which depends on oil was not able to sustain the fixed exchange regime because its foreign reserves not only depleted but foreign debt also mounted. As an integral part of the Structural Adjustment Programme introduced in 1986, the country adopted a flexible exchange rate through the Second tier Foreign Exchange Market (Iwela 2007). The Nigerian exchange rate. The most critical are the creation of a high propensity to import because an over-valued currency makes import cheaper and promotes a balance of payments deficits. In the quest for a realistic naira 9 exchange rate, the CBN employs the Purchasing Power Parity (PPP) model as a guide to gauge movements in the nominal exchange rate and to determine deviations from the equilibrium exchange rate. Although the PPP as a relative price does not provide clear criteria for choosing a base period and is generally criticized for its insensitivity to short-term policy actions, it nonetheless, provides a reasonable framework for a comparative analysis of trading partners performances (Iwela 2007). 4.1 EXCHANGE RATE REGIME IN GERMANY Germany operates a floating exchange regime system. Germany is much more competitive than its southern counterparts and this biggest economy in the Eurozone relies heavily on net exports and fixed investments while private consumption takes only a second place (ECB 2011). Growth in the Eurozone will remain sluggish and is expected to underperform the US in 2011. The economy in the 16-nation region is expected to grow +1.7% in 2011, followed by +1.8% in 2012, almost half of the growth in the US (ECB 2011). 4.2 THE EXCHANGE RATE IMPLICATION ON NIGERIAN OIL AND GAS INDUSTRY The peculiarity of the Nigerian foreign exchange market needs to be highlighted. The countrys foreign exchange earnings are more than 90 per cent dependent on crude oil export receipts. The result is that the volatility of the world oil market prices has a direct impact on the supply of foreign exchange. Moreover, the oil sector contributes more than 80 percent of government revenue (CIA 2011). 4.2 IMPLICATION FOR DES Plc Thus, when the world oil price is high, the revenue shared by the three tiers of government rise correspondingly and, as has been observed since the early 1970s, elicited comparable expenditure increases, which had been difficult to bring down when oil prices collapse and revenues fall concomitantly. Indeed, such unsustainable expenditure level had been at the root of high government deficit spending. DES performance could, to a large extent, be tied to this economic phenomenon. In addition, the removal of fuel subsidy signaled danger by the Nigerian masses as their standard of living is largely dependent on the oil and gas production and performance. 5.0 CORPORATE SOCIAL RESPONSIBILITY ISSUES IN THE NIGERIAN OIL AND GAS INDUSTRY With regard to driving forces for CSR implementation, philanthropy gets a high priority in Africa. This is due to the huge socio-economic needs which have resulted in philanthropy becoming an expected norm in society. According to the theoretical findings, the philanthropic motive has also the highest priority in Nigeria (Helg, 2007). DES Plc cannot over emphasize the issue of CSR in order to consider doing business in the oil sector of Nigeria as many players in the industry have had to put with this situation as much they can (Skjeraseth et al 2004). However, it can be said that CSR is viewed by host communities as ethical and moral obligation of investing companies and as such should not be undermined. CSR ISSUES IN THE INDUSTRY OVERVIEW RESPONSE MEASURE PLAYERS EXPERIENCES While ExxonMobil and TotalFinaElf see their responsibility primarily in terms of providing affordable and environmentally clean fuel and investments in the countries and regions in which they operate, BP aims to be a force for good (BP, 2001), and Shell will strive to build a better world (Shell, 1999) .Shell, Chevron and other players in the industry have suffered kidnap of expert rates over the years. Militancy has been on the increase in the Niger Delta region where exploration is prominent in Nigeria. The youth regard this approach as the only means to benefit from their natural endowment since there are no other ways. Provision of employment, construction of roads and employment may be some available measures to keep the potential situation in check for DES Plc. HUMAN RIGHTS In Nigeria, CSR is viewed as giving back to society and as such their ultimate right. In Nigeria, philanthropy is more than charitable giving. HIV/Aids is an example where the response by business is essentially philanthropic but clearly, in companies own economic interests. DES Plc can make provision to partner with human right organizations in order to effectively address potential issues EMPLOYEES RIGHT The Nigerian government has also through its NEEDS strategy (Nigerian National Planning Commission 2004) set the context by defining the private sector role as by stating that the private sector will be expected to become more proactive in creating productive jobs, enhancing productivity, and improving the quality of life. Nigerians maintain that companies have a responsibility to do more than maximize profits and returns to shareholders? If they do, how far does it extend? Does it include the provision of good wages and working conditions for employees; DES Plc already has a good reputation for job enhancement and upholding that corporate culture will position it against undue pressure in this regard. COMMUNITY INVOLVEMENT Nigerian communities tend to maintain a level of ownership over natural resources and as such never want to part ways with what they consider as stake. There are Landlord groups formed to foster strong opposition against whatever they perceive as injustice in oil exploration Working on the CSR agenda in Nigeria in partnership with different stakeholders in the society. Involve community leaders in the determination of locations. ENVIRONMENTAL PROTECTION Maintenance of the highest environmental standards. Oil spillage and gas flaring have been major issues hosts communities emphasize while maintaining a strong opposition against the investors. The introduction of local agricultural schemes to appeal to the affected public. SUPPLIER RELATIONS Company relations with suppliers and contractors are always questionable and not viewed as a priority (TBTIG 2011). Multinational companies initiate co-operation with the SMEs in both the formal and informal sector for local supplies. To develop a joint corporate social responsibility (CSR) agenda for Nigerian and non-Nigerian firms. This could be explored by DES Plc while sourcing materials for local use in the region 6.1 INVESTMENT METHOD However, Nigerias libralised business regime and proactive reform measures are making it easier to do business in the country (TBTIG: 2011). Owing to the preceding issues considered in this report, Foreign Direct investment will be recommended to DES Plc as a measure for expansion and penetrating into the Nigerian oil and gas sector. The Nigerian government has put incentives in place to attract foreign investors. Nigerias investment regime has been geared towards encouraging private sector involvement in the countrys economy. The corporate tax rate is 30% in all sectors except petroleum, which is taxed separately under the Petroleum Industry Bill. According to the World Investment Report 2011, prepared by the UN Conference on Trade and Development, FDI inflows into Nigeria fell from $8.65bn in 2009 to $6.09bn in 2011, with the blame placed on delays to the Petroleum Industry Bill (TBTIG: 2011). 6.2 MODE OF ENTRY However, The Nigerian government operates a deregulated society which could favour the brownfield approach. DES Plc can adopt this suitable means by merging and acquiring an asset of a firm in the industry owing to the market share core players like Shell, Total, Chevron etc already have in the industry. 7.0 CONCLUSION In spite of the corporate social responsibility (CSR) issues identified in the Niger Delta region in recent years, Nigerias huge wealth of oil makes it singularly attractive to the multinational majors, most of which are represented in Nigeria. More recently, multinational oil companies have been focusing their attention on exploration projects. They and their likes promise much for the future of oil industry investment since they allow the oil majors to diversify their investment in the country and bypass the troubles of the Niger Delta region (TBTIG: 2011). Nigerias liberalised business regime and proactive reform measures are making it easier to do business in the country. Germanys presence is scanty in the oil exploration space of Nigeria and as such that remains a quick and ample opportunity to be explored by DES Plc taking the aforementioned policies into consideration. However, owing to the issues discussed in this report it is obvious that the most suitable form of investment is Foreign Direct Investment FDI by merging or acquiring existing firm in the Nigerian oil and gas sector. REFERENCES Abah M. (2011). 50 German Firms Storm Nigeria for Investment. http://www.jangola.com/index.php?option=com_contentview=articleid=141:50-german-firms-storm-nigeria-for-investmentcatid=45:businessItemid=87 [Accessed 04/01/2012] BBC News, Africa, http://www.bbc.co.uk/news/world-africa-13949550 [Accessed 26/12/2011]. Chevron (2011). Nigeria Highlights of Operations. http://www.chevron.com/countries/nigeria/ [Accessed 03/12/2012] Danial, B. J. ( 2011). The Nigerian Economy in the 21st Century. http://www.onlinenigeria.com/economics/?blurb=498 [Accessed 26/12/2012] Daudu http://www.dawodu.com/okigbopanel1b.pdf EAPI: Energy API (2011). About Oil and Natural Gas. http://www.api.org/aboutoilgas/ [Assessed 17/12/2011]. ECB: European Central Bank (2011). Key Interest Rates for the Euro Zone. http://www.ecb.int/stats/monetary/rates/html/index.en.html [Accessed 15/01/2012]. Helg, A. 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Cameron May LTD. http://books.google.co.uk/books?id=rMRbKGyEp_gCpg=PA263dq=germany+and+wtohl=ensa=Xei=ZoMDT5rqBYfI8gPUsZ3HAQved=0CEIQ6AEwAg#v=onepageq=germany%20and%20wtof=false [Accessed 04/01.2012]. Lundvall, B. (1999). National Business System and National Systems of Innovation.[Online] International Studies of Management Organization, Vol. 29, no. 4, pp. 20-21. Available at http://www.questia.com/googleScholar.qst?docId=5001824019 [Accessed 20/12/2011]. MIS: Mbendi Information Services (2011). Oil and Gas in Nigeria- Overview http://www.mbendi.com/indy/oilg/af/ng/p0005.htm [Accessed 20/12/2012]. Mcdonald F., Burton F. (2002). International Business, G. Canale C. Italy. Patricia Levi (2004). Cultures of the World: Nigeria. 2004http://books.google.co.uk/books?id=Q_lCFcabj0MCpg=PA40dq=nigeria+oil+export+to+germanyhl=ensa=Xei=b7UDT5nlE82r8AOx3tHSBwsqi=2ved=0CFUQ6AEwAw#v=onepageq=nigeria%20oil%20export%20to%20germanyf=false [Assessed 28/12/2011]. Qfinance (2011). The Nigerian Economy. http://www.qfinance.com/country-profiles/nigeria [Accessed 01/01/2012] Skjà ¦rseth, J. B. Skodvin, T. (2003). Climate Change and the Oil Industry: Common problem, varying strategies. Manchester: Manchester University Press. http://www.fni.no/docpdf/FNI-R0704.pdf [Accessed 15/01/2011]. Shell (1999). People, Planet and Profits. An Act of Commitment. Report. London. TBTIG: The Business, Trade and Investment Guide (2011). Corporate Nigeria: Incentives for Investors http://www.corporate-nigeria.com/index/fdi/incentives_for_investors.html [Accessed 3/01/2012]. WTO: World Trade Organization (2005), Trade Policy Review of Nigeria, Geneva: World Trade Organization. The oil and gas industry The oil and gas industry INTRODUCTION The oil and gas industry is essential to survival of the economy for different purposes. The industry provides energy and chemicals to the economy vital for transport, companies and household in U.K. Through the industry the government earn valuable and substantial tax and export revenue to support the economy. The figure below tells it own tale: v Three quarters of the UKs primary energy. v Employment for more than 380,000 people. v Has invested  £ 150 billion over the last 25 years. v Has paid  £ 150 billion in taxes since the 1970s. v Adds  £4 billion a year to balance of payments. v Accounts for one-fifth of UK annual investment. (oilcareers.com) This primary aim of this report is to consider key environmental factors that are currently affecting the industry. This will be done through PEST (Political, Environmental, Social and Technological) analysis. This report will also take into consideration rationale of industry and companies chosen for this project, in addition a number of financial ratios will be considered to determine the performance of the companies in the industry. This will help in establishing where each company stands in relation to their competitors; as well allowing the strongest and weakest companies to be determined. RATIONALE FOR INDUSTRY This Oil and Gas industry contribute significantly to the economy. The rationale based on this industry choice is to gain an insight to how prepared companies are regarding the risk posed by climate change. According to a report by Palma (200*) she explored increasing pressure in the Oil and Gas industry face from climate change. She indentified such risk as: Damage to corporate reputation: As the understanding and awareness of the damages posed by climate changes increases and develops, failure to observe and account for the impact of climate change on social and environmental resources is progressively likely to damage companys status and reputation. Increasing pressure on water resources: There are growing concerns regarding changes in rainfall patterns. This has led to water shortages, poor water quality and drought and flooding has significantly increased the demand for water. For companies that rely heavily on water, increase competition for available resources could create operational problems for companies. Drop in value of financial assets: In order to meet the economy increasing demand for energy, oil and gas companies need to secure further investment for exploration, production, and manufacturing. Shareholders are placing more and more importance on the business impacts of the change, as risk impact cost and revenue drivers. It is probable that insurance cost could rise due to greater chance of physical plant damage because of weather events. Dealing with such risk is not as easy as it may sound, some companies profit may decline due to the necessary changes in order to combat climate change. It will take a collective effort as well as individual effort for the industry to maintain its status as one of Britains strongest industry. RATIONALE FOR COMPANY CHOICES The diagram below shows that the companies are similar in size, employees employed and turnover. This makes is easier for comparability purposes in finding out how each company are performing. In addition all companies chosen are in the FTSE 350. JKX Oil and Gas JKX Oil and Gas plc principle activity is developing and producing oil and gas reserve, which is conducted through there subsidiary undertakings. JKX main principle interests are located in Ukraine and in Russia, with further interest in Georgia, Bulgaria and United States. As of December 31, 2008, the Company drilled two exploration wells. As of December 31, 2008, the Company acquired 25% interest in the Svidnik, Medzilaborce and Snina from Aurelian Oil Gas plc. Cairn Energy Cairn energy Company is an independent public oil and gas exploration and production company. Together with its subsidiaries, the company engages development and the production of oil and gas largely in countries such Bangladesh, India, and Nepal. The company also operates in Tunisia, Australia, Spain and Papua New Guinea. The companys headquarter is based in the United Kingdom at Edinburgh Tullow Oil Plc Tullow Oil plc operates as an independent oil and gas exploration company. The company has over 100 licences in more than 20 countries. The group accomplished a 77% exploration success rate with 17 out of 22 successful wells in 2008. Currently in 2009, Tullow has drilled 12 successful wells out of a total of 14. FINANCIAL RATIOS Financial ratios are calculated to provide a quick and relatively easy means of measuring the financial wellbeing of a business. Ratios assist to highlight the financial strength and weakness of a business. PEST ANALYSIS In order to understand factors that affect the industry, the PEST analysis could offer some help. PEST analysis helps is the analysis of external factors which are beyond the control of the companies and these factors sometimes could be a potential treat. Moreover these factors can lead to new opportunities being created for companies to explore. Political Factor Political decisions made by the government will definitely affect the oil and gas industry in one shape or another (more (directly or indirectly)). One of the main political talking points is the effect the industry has on climate change. According to Chapman (2009), companies do not really recognize the effect the industry and company has on climate change. Steps have and are been taking to ensure that companies recognize changes in climate. The U.K government not long ago, update the Petroleum Act, tightening the law on decommissioning, making it adamant and compulsory that companies take into account the impact of climate change. The government realizes that actions and policies are needed in order for the industry to continuing providing energy for the economy while the industry reduces the amount of emission they produce and also providing new powerful energy option. In 2000, the royal commission proposed that U.K would need to reduce it emission of CO2 by 2050 and if possible t o reduce it by 80% by 2100. This was an international agreement proposed in other to prevent concentration of carbon dioxide from rising above 550 parts per million in volume. At 2000 it stood at 380 and rising, moreover in it would be safe to assume that it has risen significantly. The political factor takes into consideration political stability, pricing regulations, industrial safety regulations, tax rates and incentives and many more. An effective way in which government believe would encourage the industry to limit the amount of pollution they create is the carbon tax charge. The purpose of this is to lower greenhouse gas emission produced by the industry. Similar to this charge is the climate change levy (referred to as tax on energy). This was put in place on the 1st of April 2001. The importance of the tax is to encourage change in the industry. This has persuaded the industry to start looking new renewable energy source or risk having to pay additional cost of the levy on their energy bill. The levy applies to electricity, oil and gas industry, if a company produces the energy the use from renewable energy source they will be exempt from this levy. Furthermore companies that agree to the governments emission target will be given an 80% discount. Economical Factors The economical factor takes in consideration of such issues as exchange rates, economic growth rate, unemployment rate, inflation rate and price in oil and gas. The Oil and Gas industry is one that holds a stronghold in the world and the U.K economy and it provided 450,000 jobs in UK in 2009. It diagram below an increase in employment from 2007 and to 2008. Unfortunately the increase from 2008 to 2009 could not be shown has it had not been inputted. But from the diagram, it shows signs of improvement since 2004 to 2008. The economy in U.K receives a massive boost when there are increase of activity drill in respect to Oil and Gas. As by (========) Oil and gas production contributes massively to the government through tax revenues with a report  £271 billion being paid over the last 40 years (2008 money). Unfortunately high price for oil in the modern day is major problem for economies around the world (both rich and poor). The reality is that in many countries including UK, oil is becoming unaffordable for more and more people. In the fiscal last year (2008-2009)  £12.9 billion was contributed by the industry in terms of tax revenue, this was likely due to high oil and gas prices. If oil and gas price continue to increase this could change the balance of trade between countries and exchange rate. This increase would cause a decline in the balance payment of net oil-importing countries thereby putting downward pressure on exchange rate therefore import become more expensive and export less valuab le which leads to a drop in national income. Social Factors There different social factor affect the industry such as customer buying patterns, ethical issues and the environment. Due to very nature of the industry, the environment in real danger from drilling and transportation process. The chemical used in drilling can be harmful to the environment. The burning of oil as fuel creates destruction, whereby it contributes to such problems as global warming and acid rain. In addition, forest are now at major risk as there are increase pressure applied by the oil and gas industry leaders pushing for new drilling in sensitive and regions which were once protected Two main factors affect the industry are major event and consumer attitudes and opinion. Consumer attitude and opinion are changing in the modern day environment. More and more people are moving to solar energies instead of using fuel or gas, this is called the GREEN CULTURE. There are more concern for the environment now than ever, prompting the search for alternatives. The government intend to have in place coal and gas fired and nuclear power in place by mid 2020 as alternatives. Furthermore, employees health and safety is another political talking point. Due to the volatile conditions in which employees have to work in and also sub standard physical asset could potential have a negative impact on the health and safety of the employees which would therefore compromise the employer and public liability insurance cover. Technological Factor Technologies are essential to oil and gas industry, due to the harsh and demanding environment we currently live in; the industry leads in technological innovation in order to overcome challenges of recovering oil and gas from difficult reservoirs and deeper waters. For the industry, the need of need technology is need in order to discover new ways of reducing production cost, improving performance and making marginal fields economic to develop. The effort put in by the industry to develop new technologies for locating and producing oil and gas has led to various inventions and technical advances that have been used elsewhere. An area in which the government and the industry highlight as potential growth area is in the field of Carbon Capture and Storage. European Union alongside with other countries has recognised this potential and legislation have been put in place and funding made available in order to finance demonstration plant in Britain and other countries. The industrys knowledge of undersea geology, reservoir management and pipeline transport will undoubtedly play an important role in making this fledgling technology work effectively Advantages of PEST Easy to do The analysis provides a deeper understanding of the wider business environment in which they operate. Provides an understanding of the wider business environment. Raises potential threats to a project Through this analysis organisation can foresee future difficulties and take a course of action in order to minimise their effect It could help a company realise opportunities and utilise them Disadvantages of PEST Could take considerable time to do Variable pace of change could make it difficult to predict development which may affect a company in the future The analysis might be based on unfounded hypothesis