1. OIL INDUSTRY IN OCEANIA
Discuss about Oceania………………….TABLE OF
CONTENTSTOPIC
PAGE1.0 INTRODUCTION……………………………………………………………………………………………
…….32.0 PARTNERSHIP AGREEMENTS VS
NATIONALISATION………………………………………….32.1 MERITS……………………………………………………
……………………………….…………32.2 DEMERITS…………………………………………………………………………………
……….53.0 PRODUCT SHARING
CONTRACTS……………………………………………………………………….63.1 MERITS…………………………………
………………………………………………………..63.2 DEMERITS…………………………………………………………………
……………..………64.0 MAXIMISING OIL
REVENUES…………………………………………………………………………………75.0 COMPETITIVE
CHALLENGES…………………………………………………………………………………….86.0 CONCLUSION………
……………………………………………………………………………………………………97.0 REFERENCES………………
……………………………………………………………………………………………10INTRODUCTION The energy
sector has continued to undergo major changes and realignments today due to increased
global demands. Many countries have continued to grow in their industrial sectors and they
do not have the required capacity to provide the energy for these sectors. Oil has emerged
as the most needed resource to supplement other energy sources like geothermal, solar and
wind energy. It is a major requirement by the motor industry whose products are custom
made to run on oil products as their source of energy. Countries that have been bestowed
with this resource have attracted major companies with global standing who want a share
of this commodity. Many countries sign partnership agreements with these multinationals
for mutual benefit. But these agreements come with both their merits and
demerits.PARTNERSHIP AGREEMENTS VS NATIONALISATION.MERITS:There are various
merits that are derived by countries when they sign partnership agreements with
established companies in the oil sector. These companies are given rights to explore for
sites where crude oil will be found; they also drill the wells and are also expected to develop
the required infrastructure like refineries to process the crude oil into the various products
like petrol, diesel, cooking gas and other industrial lubricants. These operations require
large capital outlays that most governments cannot afford. Majority of these countries like
Oceania lack this capital and expertise to run this industry competitively. Majority have very
low per capita incomes and the only way they can leap from these resources is through
engaging with the established multinationals that have the requisite capacity in the
2. industry.Therefore these partnerships enable the government to get a lot of revenue that is
paid by the company in form of taxes, bonuses, rentals and royalties. These are usually
agreed on between the government and the company before they start operations. The
government is therefore able to receive a very huge boost in its revenue and can be able to
meet most of its national obligations like providing education, health care and
infrastructures like roads, airports and telecommunications.These partnerships also help in
the creation of jobs that are available to the nationals of that country. This is due to the
capital injections done by the foreign entrants who build refining companies which will
create many personnel requirements in their operations. This reduces the unemployment
levels in these countries.These private entities are very well managed compared to
nationally owned state corporations that are usually riddled with inefficiency and
corruption. The private entities are optimally run by qualified managers who set
performance targets for their employees. Therefore there is optimal use of the resources
available in the country and this will translate to higher income levels for the
government.The companies manage all their activities on their own. The government does
not inject any capital in any of the activities of the company. For nationalization the
government would be required to use a lot of its money. Therefore these partnerships save
the government a lot of money but they ensure the government gets a lot of revenue from
the company’ s activities. These partnership agreements also ensure that the government
benefit from the infrastructure that are set up by these companies. The resources are
normally discovered, in most cases in remote regions and these exploration companies
must build road networks across these areas to be able to run their activities. These
facilities are also used by the residents of these areas.DEMERITSThe implementation of
these partnership agreements usually denies the government its role of wealth distribution
in the country. Areas where these resources are not found are usually neglected by these
private companies. They only concentrate their activities in the prime locations where the
resources are found.The country also suffers a lot because there is no guarantee that the
profits made by these multinationals will be reinvested back into the country. The
companies normally repatriate most of the profits into their mother countries or they invest
in other exploratory works in other countries.The governments who sign these partnership
agreements normally don’ t supervise the activities of the multinationals. Majority of these
companies are involved in illegal activities in the localities they operate. Many are known to
even fuel tensions in the areas they operate in so that they can claim
compensation. Majority of these companies have also been blamed for polluting the
environment through oil spills that are known to sometimes occur through negligence e.g.
broken pipes.PRODUCT SHARING CONTRACTSKarim (n.d) says that these are contractual
agreements signed between the government and the oil exploration companies. There are
various merits and demerits that pertain to these agreements:MERITS These
agreements invite foreign investment to the country. The oil exploration companies are
ready to bring in risk capital to the country. The areas which are unexplored will be
explored at no extra cost to the government.These contracts also guarantee the investor
autonomy in his operations as there will be no interference in his operations. If the
exploratory works are successful the contractor is assured through the contract that he will
3. recover all his costs.These contracts also ensure that if the venture is successful the
government will earn profits even though they did not invest anything. Sinha (n.d) explains
that the government is also not liable for any of the sunk costs incase the venture is not
successful.DEMERITSThe limited knowledge the government has on the potential of the
allocated fields usually puts it at a disadvantage. Bates (n.d) says that most governments do
not know what they are giving away. If the exploratory works turn out to be very successful
the contractor will benefit a lot and it will be like a windfall to him.There is also conflict of
interest because the government would want to carry out its regulatory duty over its wealth
but the contract it has signed is binding. It also wants to leap maximum returns from the
resources but it cannot be sure whether the company involved is operating optimally since
they have no management capacity in the company.MAXIMISING OIL RETURNSThe Oceanic
authorities should enter into product sharing contracts with known oil companies. This is
due to the difficulties in funding joint ventures which are expensive to run due to
managerial challenges and huge capital requirements. As Janis (2001) asserts, these
contracts will also ensure that the national oil reserves are boosted through the sharing
formula that will be agreed upon. The government will also be able to develop other sectors
of the economy due to the gains derived from these contracts. This will therefore ensure
they have exercised their inalienable right to monetize their resources for national benefit
of all. Entering into these contracts will guarantee them revenue and growth. The contracts
they enter into should be very clear on the areas or fields they have allocated and the
period. The periods should not be more than twenty years. They should agree on how to
share the operating profits with these exploratory companies once they have succeeded in
their work. They should also agree on how the companies will share oil with the state oil
companies. This will ensure the state petroleum companies will continue boosting their
capacity. The government should also agree on a formula of how the companies will
surrender their refineries and other immovable assets upon expiry of the contract period.
Johnson (2006) says that this will ensure continuity and will position the government
strategically in taking over the industry.COMPETITIVE CHALLENGES The Oceanic
National Petroleum Company will face many challenges in its future growth but it is how it
handles them that will count. The company will be required to carry out a detailed SWOT
Analysis. Smith (1999) says that it helps businesses know how to respond to market and
competitive challenges.StrengthsThe company will definitely have an upper hand being the
main local company. Its long stand in the business and extensive knowledge in the market
will give it an upper hand.WeaknessesIts major weakness will be the lack of capacity to
process a lot of crude oil. This is where the competitors will seek to exploit. It will also face a
challenge of running efficiently if it won’ t have trained personnel in the various areas of
operation.OpportunitiesThe company will have an excellent chance to take over markets
that were previously in the hands of the exploratory companies who will go away after the
expiry of their contracts. The company can also start early negotiations with the
government to take over the oil fields that will be left by the foreigners. It should also
acquire the experienced personnel in service with the foreign companies who will be
jobless after their exit.ThreatsThe biggest threat to the company’ s future growth will be
the entry of competitors who will eat into the market share and decrease its profits. The
4. company should therefore take advantage of its strategic position as the only domestic
company in the industry.CONCLUSION The countries that discover they have crude oil
deposits and have no capacity to fully exploit the resource should consider entering into
product sharing contracts with established companies in the sector. This will be a sure way
of ensuring that they earn the much needed revenue without any initial costs. This
will enhance the growth of other sectors of the economy because the revenue got can be
diversified into those sectors.ReferencesBates, E (n.d) “ The Future of Oil in Indonesia”
(Online ) Available from http://www.indonesiaoil.com/ (Accessed on 12th April 2012)Janis,
A.(2001) World Energy Markets, Pearlson Publishers, P.23Johnson,H (2006) Marketing Mix,
Vertit Educational Publishers, P.8Karim, S. (n.d) “ Indonesian Legal Framework in the oil,
gas and mining sectors” (Online) Available from http://www.oilinasia.com/ (Accessed on
12th April 2012)Sinha, R.K.(n.d) “ Global View of Product Sharing Contracts: Indian
perspective “ (Online ) Available from http://www.oilinindia.com/ (Accessed on 12th April
2012)Smith, S. (1999) Competition in Business, Slimatons Publishers Ltd, P.41Place your
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