Can the Oil and Gas Industry Live Up to Today's Dynamics?
- Abdul-Jaleel Al-Khalifa (Dragon Oil)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- May 2011
- Document Type
- Journal Paper
- 18 - 20
- 2011. Copyright is retained by the author. This document is distributed by SPE with the permission of the author. Contact the author for permission to use material from this document.
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The continual change in Middle Eastern dynamics will have a profound impact on the oil and gas industry. Brent crude spiked when events escalated in Libya. The panic is about security of supply rather than space capacity, considering its abundance in the current oil markets. In other words, the market doubts that the current pro-customer oil policy in terms of pricing and production can be maintained going forward.
Changes in the 1960s brought OPEC into existence and changes in the 1970s delivered higher oil prices. Most importantly, these changes shifted global oil leadership from international oil companies (IOCs) to national oil companies (NOCs). So, how will the oil and gas industry adjust and reshape under today’s dynamics?
Historically, the oil and gas industry has had a narrow focus on the bottom line of creating value for shareholders. The shareholder is the government for NOCs while it is public investors for IOCs. Both strive to maximize financial earnings while delivering cost-effective performance applying state-of-the art technologies. While NOCs consider government’s responsibility to meet community needs such as job creation and sustainable growth, IOCs have focused on corporate social responsibility aimed at improving their public image. This “profit-only” business model, however, has started to fail, especially in the Middle East.
One can argue that one of the catalysts of recent Middle Eastern change is the poor standard of living in large local communities, while billions of dollars accumulate in the hands of business dealers. Many held the wrong belief that such business pockets could ensure stability and a secure supply of energy at the expense of the community at large. It was further exacerbated by companies focusing on their core business while outsourcing utilities, food catering, medical, IT, and other services. As such, companies have laid off or retired thousands of national employees, leaving room to employ nonlocal employees at cheaper rates. This has severely shrunk the value of the oil and gas industry in the eyes of some local communities.
The industry has also failed, most of the time, to build a complete chain of industrial and services support that provide job opportunities and circulate liquidity into the local economy. It is devastating in some cases when operations have to be halted to wait for a service hand to fly overseas to service tools and facilities. Billions of dollars worth of contracts to build new oil and gas facilities are also being awarded to international contractors. Both detailed engineering and procurement are sourced abroad. Furthermore, at the construction stage, the contractors normally fly in thousands of cheap nonlocal labor. While Houston is the oil capital in the Western Hemisphere, the Middle East, home to two-thirds of global reserves, does not have an energy capital yet. This only speaks for the industry’s narrow focus and failure to stimulate local industrial support.
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