Development in Oil and Gas Indusrty

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Impact of Rising Price of Oil

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Introduction to Oil and Gas

Oil and gas industry in UK is provide benefits to the lives in many ways. Through its extensive supply chain, it offers employment to thousands of people and also makes a huge contribution to the UK economy. The purpose of this report is to analyse the development in the oil and gas sector. It demonstrate the ability to evaluate the factors which affects the size and structure of the existing oil and gas industry. It also evaluate the impact of rising price of oil. At last the report will end in analysing the potential of technological change on the energy retailing industry in the next decade.

Petrol station closures and cutbacks in storage capacity have made Britain more vulnerable to oil supply disruptions

There could be many reasons why the closures and cutbacks from the petrol stations in the storage capacities have made Britain more defenceless against the oil supply disruptions. There is a very high amount of rationalization within the industry. Decline in the storage depots and refineries has also reduced the amount of petrol and diesel stocks at the filling stations (Arruda,   2014). The amount has been reduced by the equivalent of two days demand. This also indicates that average time taken by a motorist in reaching to a nearest petrol pump from home has been doubled from five to ten minutes. At present the levels of stocks are adequate enough to fulfil the six to eight days of demand but on the other side some operators did not have the enough capacity to save the money (Chalmers Davies and Monti, 2010).

Entry of the supermarkets in the industry is another reason for the closures and cutbacks in the storage capacities. The market is segmented into commercial and retail sectors. The commercial market includes industrial, transport and agriculture customers. It also includes power generators, independent fuel distributors, government agencies, public services etc (Oil and gas industry UK, 2014). On the other side retail market consists of fuels mainly sold from the filling stations. The supermarkets have captured 43.9% of the total retail fuels market. The petrol retailing has become high volume and low margin business. There is increased competition specifically from the supermarkets and this has squeezed the margins.
Demise of independent retailers is another reason for the above mentioned issues. It has decreased the supply of fuel at the petrol stations. The petrol has not been supplied in the quantity in which it is needed to be supplied (Oil and Gas Sector, 2013). It was believed that competition in the market was not working because the big supermarkets controlled the market with their purchasing power. As per the industry reports, the retail sectors had more than enough stocks to fulfil the fuel supply before the adoption of contingency plans. However the reports from the Petrol Retailers Association disclosed that industry was running with very low level of fuel reserves (Orjiako, 2013).

Due to supermarket interference and rundown in company owned and independent outlets, the total number of petrol sites has slumped to 8700 in 2011 from 37500 in 1970. However the rate of closures has slowed in the past six years but the storage capacity decreased by 15pv-20pc during the period of 2001 and 2011. Tesco, Asda, Sainsbury and other retailers control around 40pc of the £47bn-a-year petrol and diesel market from just 15pc of sites (Sarwar,  2007). It has been estimated that these closures could reduce the stocks to less than six to eight days cover. It is expected that firms are hesitant to increase capacity because it would be expensive. The independent operators can get little relief due to increasing competition from the supermarkets. The new types of contracts offered by suppliers can reduce the margins and can increase the wholesale prices also (Tordo,  2010). About 50 supermarket sites have been identified as the potential sites for the petrol forecourts.

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Another issue identified is the fragmentation in the fuel supply chain. The major oil companies such as Shell, BP, Esso, Total and many others can either sell or close out their retail outlets and decrease the refinery capacity (Tracy and Arfaa, 2011). According to the UK Petroleum Industry Association, government, the declining refinery capacity and closure of fuel plants can pose a serious threat to the energy security of supply and elasticity. There is an imbalance in the production mix as UK is exporting petrol but at the same time also importing large quantities of diesel and aviation fuel. Decrease in the spare capacity had hampered the suppleness of the system to supply disturbance (Terra, 2010). On the other side changes in the market had improved the efficiency of the supply chain.

High volume supermarket sites are buying most of the fuel from the importers but constraining with the limited storage (Tienharra, 2011). It needs refuelling at regular intervals. It shows that there will be lack of supply of petrol while the course of supply disruptions. It is quite difficult to achieve the balance between the supply and demand of the fuel.

Business Models

UKPIA

UKPIA represents the interests of eight member companies which are engaged in the UK downstream oil industry. It holds the responsibility to handle common issues related to refining, distribution and marketing of oil products. The association is responsible for informing its members about the proposed legislation and related developments (Tordo and et.al., 2013). It also advocate the position of the industry and it is an authoritative source of information on the UK downstream industry. The secretariat of UKPIA is a team of six people which works under the direction of Director General. The strategies and policies are decided by a Council consisting of members which are appointed by the member companies. Different types of standing committees have been developed which covers the key policy areas and operations within the industry (Chalmers Davies and Monti, 2010). The member companies supply over 33% of the energy used and source over 85% of the petroleum products sold in UK. Among 8591 service stations in the country, 1483 are owed by UKPIA. The body is also responsible for providing employment opportunities to more than 88000 people. It associates are also involved in the process of safety and transportation within the oil and gas industry.

Oil and gas industry

The industry is offering high amount of benefits to the country and the economy. The energy products take into consideration the modern society and supplies energy to the power industry. Fuel is provided for the transportation of the goods. The supply chain management is very strong and it provided employment to thousands of people (Oil and gas industry UK, 2014). The first production was started in the year 1960 and since then it has faced the challenges like volatility, changing regulation, maturity and the changing view points of the society. The primary objective is to attain large number of advantages from the oil and gas reserves through working in great coordination with the government (Oil and Gas Sector, 2013). There is a need to achieve balance between economic and social benefits of oil & gas production through effective maintenance of natural resources and showing great care for the environment (Tracy and Arfaa, 2011).

The sector identifies the measures to make the economy free from carbon. These measures helps in satisfying the energy requirements of the economy. The focus is paid on making optimum utilization of the oil and gas reserves (Chalmers Davies and Monti, 2010). This objective is not achievable in small period of time however it requires very careful management over not just years but for decades. As per the experts the UK oil and gas industry has the required potential to make oil and gas as the most valuable and desirable commodities in the economy. It is believed that if 15% of the energy is achievable from renewable sources, they will be relying on oil and gas for 70% of their needs. Those oil and gas which cannot be produced by the industry are imported from the other countries on extra significant costs (Tracy and Arfaa, 2011). In this case UK is having a good fortunate that still 40% of the related reserves are to be extorted. This offers many valuable business opportunities to be in cashed and to utilize the resource in best manner possible.

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Preparation towards the risks factors

There are many issues and barriers for the oil and gas companies. There can be many laws and policies which directly or indirectly affects the production activities in the industry. These are in terms of licensing, joint venture, service contract, operational issues, construction, disposal and many other activities (Tordo and et.al., 2013). The people especially the employees working in the oil and gas projects are required to work near the extracting locations. They are faced with many volatile and unpredictable conditions. The ability of the extracting companies to maintain and expand the production is also dependent on the success of their exploration and recovery efforts. Lack of regulatory requirements and fulfilments also results in the cancellation of the oil and gas projects from the host government (Tracy and Arfaa, 2011).

Conclusion

From the above study it can be concluded that UK is blessed with substantial resources of oil and gas. There is a great support to the balance of trade in the goods and services. The contribution of the industry can be seen in terms of employment, exports, energy, investment and tax revenues. It is also achieving growth because hundreds of billions of pounds of private investments has been allowed. Success of the industry relies on long term, complex and capital intensive oil and gas projects.

References

  • Arruda, M. G., 2014. Global governance, health systems and oil & gas exploration. International Journal of Law and Management. 56 (6)
  • Chalmers, D., Davies, G. and Monti, G., 2010. European Union Law: Cases and Materials. Cambridge University Pres.
  • Oil and gas industry UK, 2014 [pdf].Available Through<http://www.scotland.gov.uk/Topics/Business-Industry/Energy/Energy-sources/traditional-fuels/oilandgas>>.[ Accessed on 21st December 2015]
  • Oil and Gas Sector, 2013.
  • Orjiako, A, 2013. Indigenous Companies to Determine Future of Oil, Gas, Says Orjiako.
  • Sarwar, M., 2007. Effects of tax increases on the oil industry: first report of session 2007-08, report, together with formal minutes, oral and written evidence. The Stationery Office.
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