Europe's Energy Strategy and Effects on the Oil and Gas Industry

Europe’s Energy Strategy and Effects on the Oil and Gas Industry
Table of Contents
Introduction to the Issue 2
How New Policies will Impact the Oil and Gas Industry 3
Political and Regulatory Factors 3
Social Factors 4
Technological Factors 4
Environmental Factors 5
Legal Factors 5
The Future of the Oil and Gas Industry 6
Options for Risk Management in the Oil and Gas Industry 9
References 12

 
Europe’s Energy Strategy and Effects on the Oil and Gas Industry
Introduction to the Issue
Because of uncertainty in Ukrainian Crimea, it has been said that the European Union (EU) needs to focus on energy efficiency, alternative sources of gas, renewable energy, coal and gas with carbon capture and storage and nuclear power. In the global oil and gas sector, the transforming landscape presents several crucial risks and uncertainties. Among the most important risks and uncertainties are those related with the emergence of substitute for petroleum for industrial, business and household use (Ornole, Borisade & Muhammad, 2004; Al-Harthy & Khurana, 2007; Mishra & Rahman, 2011). For example, due to the emergence of non-conventional oil and gas, the demand for petroleum from industries such energy-efficient vehicles has transformed the demand for oil (Mishra & Rahman, 2011). Moreover, gas producers now face uncertainty due to government policies promoting towards alternative fuels for fuel. Aside from these, significant portion of oil commerce has shifted to Asian countries thereby generating geopolitical risks and uncertainties (Deloitte, 2013). These are only some of the risks and uncertainties that oil and gas companies as well as related industries have to deal with.
This essay will examine how new policies and technologies aimed at improving EU energy security will have an impact on the oil and gas industry and what should be done about these issues within the industry. The thesis of this essay is that the extant literature points to strategic management as one way of identifying and managing risks, as well as avoiding uncertainties. Indeed, companies that are challenged with significant risks have been increasingly turning to strategic management principles as overall response to risk and uncertainty (Beasley & Frigo, 2007; Frigo & Anderson, 2011; Frigo & Læssøe, 2012). In a nutshell, strategic risk management (SRM) entails the integration of risk in strategic management (Beasley & Frigo, 2007). It is “a process for identifying, assessing and managing risks and uncertainties, affected by internal and external events or scenarios” that could constrain the organization’s “ability to achieve its strategy and strategic objectives” (Frigo & Anderson, 2011, p. 22). The ultimate goal of SRM is to create and protect shareholder and stakeholder value.
How New Policies will Impact the Oil and Gas Industry
Political and Regulatory Factors
There are many political and regulatory factors at the present time in this industry in Europe. As of 2012, 57% of global consumption of energy is derived from oil and gas supply while their combustion “accounted for roughly the same proportion of global CO2 emissions” (Mitchell et al., 2012, p. xii). More often than not, oil and gas exports are “more than 15% of the value of global exports and provide more than 25% of GDP in Russia, Central Asia and members of the Organization of the Petroleum Exporting Countries (OPEC)” (Mitchell et al., 2012, p. xii). With the changing nature of the energy industry and shifts in the international economic and political environment in Eastern Europe and Asia, companies must keep track of development requirements now set into play by governments world wide. After the BP oil spill, for example, there has been an increased call for regulation of all natural resource companies (Kerr et al., 2010). As the companies face more difficult locations in which to extract resources, under new regulatory frameworks, their strategic and competitive differentiating factors and assets may become harder to maintain. Economic risks have also escalated since the onset of the global financial crisis, as noted by Kaplan (2009). Many oil and gas producing countries suffer from social and economic volatility which make them particularly prone to conflict and political instability. Rapid population growth, unemployment in the youth demographic, and, in addition, democracy deficits and failure of regimes to diversify their economies have created severe strain in important oil producing countries have created severe in important oil producing countries like Saudi Arabia, Iran, and Nigeria, as well as in Russia. These strains are likely to deepen.
Social Factors
Due to social awareness of the impact of oil on the environment as well as social changes in oil-producing countries, oil companies face growing security risks as they move into more unstable parts of the world in search new oil reserves (Luft, 2006). In many of these regions of the world, as well, oil companies also come into contact with the threat of terrorism, even in the context of significant support from local government agencies (Al-Thani, 2009). This means that there are increased risks that may continue to become issues as increased strain is caused by social and political change in these regions. In addition, pipelines have been shown to be able to be sabotage, which can result in a cessation of the flow of oil (Luft, 2006). To this end, pipeline sabotage has, over time, been used as a means of controlling supply more frequently, resulting in an increase in the premium on gasoline by approximately $10-$15 per barrel of oil (OPEC, 2012). This, in turn, drives up costs to consumers as well as to the companies that produce and market oil and gas products.
Technological Factors
In addition, the amount of technological change is high, and will continue to be high for the foreseeable future. New experimental protocols in geological exploration include the use of radon mapping, seismic and structural mapping, integration of biological testing models, and computer simulation techniques that integrate multiple factors and models (Dvir & Rogoff, 2009). While drilling was the classical method for gaining access to oil and testing for reserves after the prospecting phase, this has changed since the industry shifted towards alternative locations in the last several decades as more typical oil deposits have dried up (Dvir & Rogoff, 2009). It is also the most expensive means of oil exploration (Jakobsson et al., 2011), which means that it produces the highest level of risk.
Environmental Factors
Environmental issues can affect all businesses, but have a very specific effect on the oil and gas industry. The frequency and intensity of natural disasters have a direct correlation with the changes in the global temperature (Church, 2010), which many world leaders and consumers are blaming on oil and gas companies and their explorations. Institutions within this industry must be “robust to the risk of an eventual slowing down or reversal of some of the factors that have been favorable for so long, including global peace and Indo-Chinese growth” (Rogoff, 2006, p. 298). As environmental sustainability becomes an ever-increasing consideration, growth within the oil and gas industry will no longer be a valid framework in which to facilitate trade. Without resorting to extreme production techniques, different solutions must be developed in order to ensure security from a global economic collapse.
Legal Factors
Legal challenges that will likely have an effect include those connected with the environmental and economic challenges outlined above. As regulators hold oil and gas companies responsible for environmental disasters, they will likely become more legally liable for those disasters, adding to risk. In Europe, there may also be legal issues to manage linked to the closure of contracts from Ukrainian or Russian-controlled entities in the wake of a civil or bilateral war.
The Future of the Oil and Gas Industry
Risks and uncertainties pertaining to substitutes in the oil and gas market may be considered in terms of increasing meaning of alternative energy sources, as well as newly discovered non-conventional gas that include shale gas deposits in other parts of the world (Mitchell, et al., 2012; Deloitte, 2013).Alternative sources include those other than oil and gas such as nuclear, solar, coal, wind. These substitutes are perceived as offering notable benefits in terms of environmental impact as well as sustainability. However, at this point, it is believed that shifting to renewable energy sources is costly. Demand for oil will likely be on the rise for a significant period of time, with need required in both the transportation industry and for production capacity, specifically in China, India and the Middle East. Over the last twenty years alone, crude oil consumption in China has been increasing at over 7% over year, while consumption in the United States, Europe and Japan was already falling well before the economic crisis began, and has continued to fall in recent years. This shift towards China allowed for equilibrium between supply and demand in a stagnant period of production (Hamilton, 2009).
Nevertheless, there is increasing pressure for production and renewable energy in light of climate change. Whereas power companies may sift their primary energy mix to a certain degree without incurring significant costs, a thoroughgoing transition to these substitutes would entail investment in new facilities that potentially translate into high switching costs. Ultimately, however, as reserves of oil and gas diminish over the following years, it may be expected that substantial increases in the development of alternative fuels will accelerate such that these products will become more readily available and oil and gas products become increasingly expensive. The findings from the research literature in oil and gas exploration demonstrate that there is a decreasing value equation when it comes to locating viable sites, at least in terms of the amount of risk accumulated by geological exploration teams and their firms. Many oil and gas producing countries suffer from social and economic volatility which make them particularly prone to conflict and political instability. As noted above, as environmental sustainability becomes an ever-increasing consideration as well, existing methods of exploration and extraction within the oil and gas industry will no longer be a valid framework in which to facilitate trade, and solutions must be developed in order to prevent a global industry collapse over both the short and the long term (Aguilera & Ripple, 2012).
Experimental protocols like the suggestion of the use of radon by Khattak, Khan, Ali, and Abbas (2011) are likely to become more frequently used, whether or not these approaches are both safe and economically fruitful, due to the fact that there are fewer and fewer areas in which to locate oil reserves. As the research plan suggested by Kontorovich, Epov, Burshtein et al. (2010) in Russia demonstrates, key tools will likely need to include wide-scale environmental and seismic mapping in order to narrow down the possibilities for new exploration before the testing and gaining access phases take place, if at all. And, as Teichmuller and Wolf (2011) demonstrate, additional correlations using research models from other fields such as biology in combination with geological modeling may prove successful in locating new areas for oil and gas reserves. While in an environment where resources have become more scarce, it is important to take note of all innovations, the integrated exploration model offered by the Garland et al. (2012) research team is likely to be the most viable over the long term. There is a need to develop tools that take advantage of computer modeling techniques that integrate multiple factors as well as scenario predictions in order to determine whether or not to proceed to gaining access and drilling. The integration of models from different locations, but with similar geological features, will help geologists to be able to mitigate potential challenges over the long run, and demonstrate value to both governments and to oil and gas companies.
Impending changes for the global oil and gas industry have become increasingly forecasted (Mitchell et al., 2012; MarketLine, 2012, Deloitte, 2013). For more than a century, production growth in the oil and gas sector had been driven predominantly by the Western market, as well as competition between private companies for access to reserves (Gao, Hartley & Sickles, 2009). Since 2005, oil prices “have moved to a permanently high level” (Mitchell et al., 2012, p. xii). An important development is that other industries have been tapping upon some of the demand for transport by designing and creating more fuel-efficient “engines, vehicles, ships and aircraft, and by supplying alternative fuels” (Mitchell et al., 2012, p. xii). Aside from these, new advancements in technologies are delivering diverse yet uncertain opportunities for the production of non-conventional oil and gas in many parts of the world (Zambrano, Sublette, Duncan & Thoma, 2007).
It is evident that the context of oil and gas is changing. One of the challenges is that most estimates of oil and gas potential are likely to be overstated (Jakobsson et al., 2011). What this means is that it is important to understand that as oil and gas reserves become more scarce, positive exploration opportunities have tended to become overestimated in a general sense. In other words, while the technologies for finding and gaining access to oil and gas reserves have become more sensitive and usable, the means by which to extract and refine the oil has become more difficult over the long term. Not only are there more barriers in place at the regulatory level, but the viability of reserves has become more tentative.
Options for Risk Management in the Oil and Gas Industry
In the past, the oil industry was reluctant to embrace risk management techniques (Al-Thani, 2008). Nonetheless, in recent years, it has been recognized that the risks encountered in all sectors of the industry need to be addressed to ensure commercial viability of an oil and gas project, as through the protocols illustrated in the following figures.
Figure 1: Typical Risks in the Oil and Gas Industry

(Source: Al-Thani, 2008, p. 3).
Figure 2: Necessary Risk Assessment Protocol for Oil and Gas Industry

(Source: Al-Thani, 2008, p. 10).
Figure 3: Oil and Gas Industry Risk Management Model

(Source: Al-Thani, 2008, p. 11).
The production side of the industry is characterized as “high-risk” due to the sizeable investment level on the part of investors, as well as the range of geological, fiscal and political uncertainties these investors need to bear both in their own locations as well as those associated with host producing countries (Al-Thani, 2008), as is in the situation in the EU at the present time. There is also EU risk associated with the sale of oil and gas products, related to uncertainty of the crude (supply) and the product market (off-take) (Al-Thani, 2008). Because of these risks, oil and gas players have need to seek growth in value rather than volume.

References
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