OIL AND GAS BUSINESS ENVIRONMENT :TOTAL EXPLORATION AND EXPLOITATION CHALLANGES (Eropean Business Environment Final Assignment) 1. Alicia Irzanova 2. Novi Natalia 3. Stephanie Suwandi
I. INTRODUCTION Demand for oil There’s no doubt that demand for fuel in the future will keep increasing. Until now, even there are several alternative sources of energy, fuel is still the most favorable, one of the reasons is the affordable price than others. Thus, many researches provide us with the same forecast, i.e. the increasing demand for fuel in the future. In the International Energy Outlook 2010 projections, total world consumption of marketed energy increases by 49% from 2007 to 2035. Even in different economic growth scenarios (high, normal, or low), demand for fuel is expected to increase in the future. Or in more extreme words, we can say that there is no limit for fuel demand. Source: World Energy Demand and Economic Outlook 2010 (http://www.eia.doe.gov/oiaf/ieo/world.html) In the other hand, supply for fuel is limited. Research result shows that the fuel production is expected to increase until it reaches its highest point in around 20th century and then the fuel production will be decreased (called by “peak oil” – the point when the maximum rate of petroleum extraction is reached, after which the rate of production enters terminal decline). So, when the demand and supply for fuel meet in the market, they create an increasing trend in oil price. Source: http://leest1.wordpress.com/
II. CONCEPTUAL FRAMEWORK The global business environment can be defined as the environment in different sovereign countries, with factors exogenous to the home environment of the organization, influencing decision making on resource use and capabilities. The environment comprises several sectors; those are industry, raw materials, human resources, financial resources, market, technology, economic conditions, government, socio-cultural, and international. Cultural challenges stem from differences in language, concepts of time and sociability, and communication styles. From the economic point of view, the managements need to know need to know the country’s level of economic development and impact of fluctuations in exchange rate. The managements also have to deal with the challenges that come from the vast differences in legal and regulatory environments. Being effective in carrying out international business transactions often requires not only the willingness of the manager to accept the challenges of different language, foods, climates and so forth, but also a knowledge of the salient differences between the home and host country. (Daft, 2007)III. COMPANY PROFILE – TOTAL Total S.A. (TOTAL) is a multinational company which is based in France and listed as one of the top 10 oil producers. Now, Total operates on many exploration blocks, on five continents, in more than 130 countries, as an operator or as a partner. Total engages in all aspects of the petroleum industry, including upstream operations (oil and gas exploration, development and production, LNG) and downstream operations (refining, marketing, trading and shipping of crude oil and petroleum products). It also produces base chemicals (petrochemicals and fertilizers) and specialty chemicals for the industrial and consumer markets. In addition, Total has interests in the coal and power generation sectors, also in solar-photovoltaic power, both in upstream and downstream activities. The topic of this paper will be limited to Total’s upstream business segments and how Total deals with the global business environment.
IV. ISSUES IN GLOBAL BUSINESS ENVIRONMENT In upstream business, mainly there are two activities; are exploration and exploitation. Here, we will discuss global business environment aspects that affect the activities one by one. 1. EXPLORATION Oil and gas exploration is the search by petroleum geologists and geophysicists for oil and natural gas deposits beneath the earth’s surface. Environmental factors that affect exploration activity: 1.1. Physical and Geological Aspects Below is the world mapping of proven oil reserves. Source: BP Statistical Review of World Energy June 2010 (http://energyforumonline.com) Actually, there are more oil reservoirs than what have been mentioned above in the graph, such as oil reservoir in the arctic, but because of reservoir characteristics and limitations in petroleum exchange technologies, only a fraction of this oil can be brought to surface (producible) that is considered to be reserves. Based on world mapping of oil reserve, it is clear that oil reserves are scattered to all over the world, and so Total, in order to expand its business, should explore and operate on more drilling rigs which most of its are outside France, country of Total’s headquarters. Inevitably, Total has to deal with local regulations and local culture in every country where Total operates drilling rigs.
1.2. Geopolitical Aspects From above map of proved reserve, we also can see that the amount of oil in oil reserves is not equally distributed among regions or continents. Most of them are in the Middle East. Since oil is such an important resource for people and industries, many countries would like to have power in countries that have big oil reserves. This power struggling surely has impact on political conditions of countries which are known for its big oil reserves. In facing the geopolitical aspects, Total tends to minimize its operation in regions that have unstable political condition. However, every country must have its political upheavals, including countries where Total operates its drilling rigs. This political condition and how Total deals with it create certain impact on Total’s business. Here are several cases related to political condition in certain country which Total has ever to deal with.
Case One : Bolivia(Source : http://www.energy-pedia.com/article )The Nationalization of Oil Companies PolicyJust before the May 1, 2006 decree, Morales met with Chavez and Castro inHavana to sign a socialist trade agreement that made Morales a member ofthe Bolivarian Alternative for the Americas. The three are now calling it the"Axis of Good," a pact originally signed by Chavez and Castro last year.This socialist trade agreement seemed had a significant impact of Moralespolicy to nationalize all the foreign oil companies in Bolivia. Since, Chavezwas the one who started the policy to nationalize all the foreign companies inorder to have more significant control to all the foreign companies inVenezuela.In May 2006, Morales announced that he was going to nationalize all the oilcompanies giving the oil companies propositions such as, reimbursement ofall the operation cost as in the return the government would get 82% of therevenues leaving the oil companies with the rest of 18% revenues. All theoil companies were given 180 days to state their action weather they wouldtake the proposition or leave the country.
While foreign companies said that they hope for cooperation, Repsol YPFhas said it would act to protect its investments and take legal action ifnecessary. Petrobras had made similar threats and frozen investments.The nationalization policy was a big worry for all the foreign oil companies,because it would not just have given the full control over their oil drillingactivities and productions but also significantly cut down companies’revenues.But since there were no more what so called easy oil and the increasingdemand for oil every year, in order to keep up with the oil demand, Total SAin October 2006 decided to make a statement by signing the agreement withBolivian government in order to keep operating in its blocks.Case Two : Libya(Source : http://lytimes.blogspot.com)
The War for Human Right or the War for the Black GoldOil reserves in Libya are the largest in Africa and the ninth largest in theworld with 41.5 billion barrels (6.60×109 m3) as of 2007. Oil production was1.8 million barrels per day (290×103 m3/d) as of 2006, giving Libya 63 yearsof reserves at current production rates if no new reserves are to be found.Libya is considered a highly attractive oil area due to its low cost of oilproduction (as low as $1 per barrel at some fields), and proximity toEuropean markets. Libya would like to increase production from 1.8 Mbbl/d(290×103 m3/d) in 2006 to 3 Mbbl/d (480×103 m3/d) by 2010–13 but withexisting oil fields undergoing a 7–8% decline rate, Libyas challenge ismaintaining production at mature fields, while finding and developing newoil fields.Most of Libya remains unexplored as a result of past sanctions anddisagreements with foreign oil companies. Cumulative production through2009 was 27 Gbbl. Given the stated number, this would be 65% of reserves.(Source : Wikipedia).The Middle East revolution started in Tunisia, Egypt and then latest in Libyais strongly believed not just the matter of bringing down the dictatorialleaders and the concern of human rights but the most of it, it’s about the oil."Operation Libya" is believed as the part of the broader military agenda inthe Middle East and Central Asia which consists in gaining control andcorporate ownership over more than sixty percent of the worlds reserves ofoil and natural gas, including oil and gas pipeline routes.All the nations such as America, French, England, and Italy involve in“helping” Libya people fight against their dictatorial leader, in order toprovide better political situation in that country but certainly this is not goingto be a free help for Libya people. Any new government that will be formedafter Qaddafi being deposed will have to ”payback” for the helping hands, inthis case with the part of any Libya oil fields.
Case Three : BurmaThe French oil giant Total S.A. (Total) continues to be linked to killings andforced labor in Burma and continues to mislead policymakers, investors, andthe general public about its impacts in the military-ruled country, accordingto the Washington DC-based nongovernmental organization Earth RightsInternational (ERI).In a recent response to ERI’s 106-page report Total Impact: The HumanRights, Environmental, and Financial Impacts of Total and Chevron’sYadana Gas Project in Military-Ruled Burma (Myanmar) (Sept 2009),Total categorically denied ERI’s evidence of ongoing human rights abuses inthe area of its natural gas pipeline in the country.A new 35-page report released today by ERI, entitled Total Impact 2.0,explains in detail how Total failed to refute any of ERI’s fresh evidence offorced labor, killings, and multi-billion dollar profits funneled to theBurmese regime through the company’s natural gas pipeline. ERI noted that“a close reading of Total’s response makes it abundantly clear that thecompany hasn’t refuted our research and documentation on the human rightsand financial impacts of their project.”Total Impact 2.0 is the third report released by ERI in 2009 regarding Totaland Chevron’s impacts in Burma. The 81-page report Getting it Wrong:Flawed “Corporate Social Responsibility” and MisrepresentationsSurrounding Total and Chevron’s Yadana Gas Pipeline in Military-RuledBurma (Myanmar) was released in September 2009 and is an in-depthexposé of five impact assessments commissioned by the companies from2002-2008.A villager quoted in the ERI report summed up the fundamental problemwith CDA’s work in Burma: “We did not say everything we knew clearly tothese foreigners because we had been warned by the soldiers in advance.”(source : www.laborrights.org).For Total SA, the cooperation with the Burma’s dictatorial government hadclearly reduced the value of the company. For the Total, it must aboutfinding the profitable oil fields but certainly it is not all, The Total SAmanagement must really pay attention to this issue in order to maintain thecompany value and image of the company in the world society. It is a bighomework for Total SA.
2. EXPLOITATION Exploitaion is the process of lifting hydrocarbon from reservoir under the ground to the surface. Exploitation can be done after the exploration shows a positive symptons of hydrocarbon existing under a certain area of land. To conclusively determine the presence or absence of oil or gas, an exploration well is drilled. In the exploitation phase, Total as well as the other oil companies, has to deal with at least two issues; technological and environment issue. 2.1 Technological issues As mentioned in the previous part of this paper, oil reserve in the world is getting harder to find. The oil and gas society shares a common view about it. Easy oil was now history, and breaking frontiers to find new oil was “incridibly dificult”, Bower wrote in his book, Oil (2010). Total has working areas around the world. Based on the geographycal grouping as mentioned in Total’s 2010 annual report, the working areas consist of Russia, North America, South America, Asia Pacific, Middle East, North Sea (Europe), and Africa. Total has been presetn in Russia since 1989. Total’s production there was 10 kb/d in 2010 and it represents 1% of Total’s overall production. In 2010, TOTAL’s production in North America was 65 kboe/d, representing 3% of Total’s overall production. In South America, the production was 179 kboe/d, representing 8% of the overall production. TOTAL’s production in the Asia-Pacific region was 248 kboe/d,representing 10% of the overall production. In Vietnam, Thailand and Brunei, the Total made several discoveries. Total also acquired a 24.5% interest in the Arafura Sea and the Amborip VI blocks in the Arafura Sea, both in Indonesia offshore. In the Middle East, Total’s production was 527 kboe/d, representing 22% of the overall production. In Europe, the production was 580 kboe/d,representing 24% of the overall production. North Sea represents the second largest producing region for the Group with 559 kboe/d (23%) of its production. Total has been in Africa since 1928. The African continent is the biggest contributor to Total’s production with 756 kboe/d of which West Africa represents 660 kboe/d of production (respectively 32% and 28% of the Group’s overall production). Its exploration and production operations are primarily located in countries bordering the Gulf of Guinea, particularly Angola and Nigeria, as well as in North Africa.
In 2010, Total has made some agressive progress such second oil discovery ondeep offshore Block 17/06, fourth and fifth oil discoveries on deep offshoreBlock 15/06, and Hydrocarbon discovery on the OML 136, Nigeria.TOTAL will become the first operator in Angola and first operator in deep-offshore in West Africa with the start-up of Pazflor (production start up isscheduled in late 2011). In 2011, TOTAL acquired a 33% interest in Blocks 1,2 and 3A in Uganda for 1.5 G$.As we see from the data, most of Total’s new blocks are offshore blocks, someof them are deep sea offshore. For example, some blocks in Myanmar (beganto be developed in 1992) and Thailand (started to be developed 1990 and1996). Some deep sea blocks in Angola and Gabon are even started thedevelopment in 2010.Offshore drilling typically refers to the discovery and development of oil andgas resources which lie underwater. There are many different types ofplatforms for offshore drilling activities, from shallow-water steel jackets andjack-up barges, to floating semisubmersibles and drill ships able to operate invery deep waters. Typical Shallow shelf oil wells (e.g. North Sea) costUSD$10 – 30 Million, while deep water wells can cost up to USD$100 millionplus.This high cost of offshore drilling are strongly related to sophisticatedtechnology to enable the wells go under the water. Oil and gas scientists hasbeen developing this technology all the time. In 1993, Dutch oil company,Shell, had broken a record. Using a rig tied to the seabed by barn-size anchorsin 2,860 feet of water, their geologists had found a giant reservoir called Auger5,000 feet below the seabed. In 1995, Shell’s new technology enable the oiland gas nearby Mensa field, which abandoned in 1988 as technically toodifficult, to be extracted from 5,400 feet deep. But just a year after that, in1996, British oil company, BP succesfully extracted oil from 14,700 feet belowthe sea off Nigeria coast.By operating in deep sea fields, Total has proven its ability to adopt theoffshore drilling technologies. This ability is clearly needed to keep itexistences in oil industry. But this doesn’t mean that Total doesn’t have anychallanges in onshor drilling.Most of Total’s onshore blocks had been exploited earlier. For example someblocks in Brunei began to be developed in 1986 and in Venezuela began to bedeveloped in 1980. However, some of onshore blocks are still found recently,for example in Iraq (2009).It means that Total’s onshore fields are encountering natural productiondeclining caused by oil depletion. Oil depletion occurs in the second half of theproduction curve of an oil well, oil field, or the average of total world oil
production. It means that Total has to do more effort to keep the production of those field from lowering. However, as Shell former President, Hofmeister mentioned in “Why We Hate the Oil Companies” (2010), technology advances will allow us to increase yields from existing hydrocarbon sources, extract resources from previously unreachable or seemingly impossible geologies Enhanced Oil Recovery (abbreviated EOR) is a generic term for techniques for increasing the amount of crude oil that can be extracted from an oil field. This technique usually used for declining fields. Using EOR, 30-60 %, or more, of the reservoirs original oil can be extracted compared with 20-40% using primary and secondary recovery. Enhanced oil recovery is achieved by gas injection, chemical injection, microbial injection, or thermal recovery (which includes cyclic steam, steam flooding, and fire flooding).2.2 Envorinment Issues Oil companies and society have always been in a complicated relationship. In one hand, oil companies are needed to supply our energy demand, but in another hand, oil companies have been accused as the main suspects of environment damage because of its operations. Besides natural environmental issue, oil company also have to face social issue. Most of oil field located in the remote area if not in the offshore. The presence of oil company employee with full facitlity in the site usually raises a social gap with local people. To mitigate this issue, oil companies have at least two actions; implementation of Health, Savety and Envorinment (HSE), and Corporate Social Responsibility (CSR). HSE is expected to mitigate technical and operational risk, while CSR is expected to mitigate social risk. Total uses some indicators to evaluate its HSE performance such as Injury rate per million hours worked, Hydrocarbon discharges in effluent and greenhouse emision. The lower those indicators the better the company’s HSE performance. While to mitigate social issues, Total recruited local people where the operation located. Total employees consist of 20% South American, 32% Asian, 22% European excluded French, only 9% French and 17% other ethnics. Beside recruiting locals, like the other oil companies also do special activity for is CSR, such as environment preservation, education assistantce, microbusiness develompment, etc.
V. CONCLUSIONTotal shares common business environmental and problem with the other oil company.The objective of oil company is to get a right to operate or to invest in an oil field.Along with harder it is to find a reserve, oil companies cannot only find the oil reservein their origin country. In the exploration phase, Total not only has to perform a bettertechnology and plan of development to get the right of operating or investing in a fieldin another country. Since political matter influence the decision of goverment of thecountry, Total also has to understand political relationship between French, as Total’sorigin country, with the country where the field and make a good exploitation policy.Dealing with limited and declining oil resouce, Total has to at least be able to adopt, ifcannot inovate, the approprieate technology to achieve production target of uneasyfields.Being in a high risk industry, Total has to face at least two environmental issue; natureand social issue. These risk have to be mitigated with a good strategy.Total can maintain it’s competitiveness by performing a good exploration policy,technology continious improvement and good risk management.
ReferencesBower, Tom (2009), Oil: Money, Politics and Power in 21st Century, New York : Grand Central.Daft, Richard L. (2007), Understanding the Theory and Design of Organizations, South-Western: Thomson.Hofmeister, John. (2010), Why We Hate Oil Companies, New York: Palgrave Macmillan.Total Factbook Global (2010)