By students, for students.

Big Oil gets bigger

In Management on January 17, 2013 at 1:22 pm

oil

1)       Are companies such as Exxon Mobil, BP Amoco and Royal Dutch/Shell MNEs? What criteria do they meet that makes them MNEs?

Exxon Mobil, BP Amoco and Royal Dutch/Shell are categorised as multinational enterprises because they have operations in one or more countries other to the country in which they are headquartered. For example, Exxon Mobil is the largest refiner in the world, headquartered in Texas with oil refineries in 21 countries. Exxon Mobil, BP and Shell serve customers the world over.

Despite some regional bias, oil and gas companies have penetrated markets beyond the usual operational spread of MNEs. This is explained by the high levels of investment required to profit from mature oil fields and emerging opportunities in hard-to-reach areas. In this sense, they are more truly global than most MNEs. However, state protection prevents effective competition in some regions, such as the Middle East and Russia.

2)       How important is an understanding of governmental regulation to success in this industry?

The hundreds of billions of dollars in revenues earned by leading oil and gas MNEs is indicative of the essential role energy possesses in industrialised economies. Oil is used to power transport, machinery and to produce packaging and plastics. Subsequently, the ownership and control of energy resources has become a key concern of national and international politics, not least because of international concerns.

Oil and gas, as geographically-fixed resources, has been conceived of as belonging to the state. This belief has led some countries to protect their interests by giving state owned oil MNEs privileged access to national reserves. In terms of oil equivalent reserves, leading MNEs are outstripped by state owned companies in the Middle East, South America and Africa. This provides a crucial competitive advantage. Sinopec and China National Petroleum, the fourth and fifth largest oil firms, are owned by the Chinese government.

Energy policy concerns the development, production, distribution and consumption in the oil industry. Policymakers regulate oil MNEs with an eye to securing cheap, stable and sustainable energy. The potentially devastating consequences of contravening government regulation are illustrated by the Deepwater Horizon oil spill. The largest accidental marine oil spill cost BP $30 Billion in legal obligations.

Understanding the regulatory boundaries within which your firm may operate is an essential component of success in this industry.

3)       In terms of Porter’s determinants of national competitive advantage, which one of these four determinants is most important for these oil companies? Why?

Michael Porter of Harvard University found that the determinants of countries’ success in international competition were four-fold: factor conditions, demand conditions, related and supportive industries and environmental conditions. Each of these has a bearing on the relative performance of oil companies.

Factor conditions include the natural resources which the energy industry develops and distributes and, therefore, must be considered the essential determinant. The domestic workforce is also described by this factor. In addition to requiring massive reserves of manual labour, oil companies require highly skilled scientific, technical and managerial employees. America’s education system, for example, would be considered under Porter’s model.

Demand conditions and the presence of supporting industries explain why large and developed economies dominate the oil and gas industry. Supporting industries include engineering, oilfield service equipment, processing specialists, stockists and distributors, system integrators and offshore support services.

The presence of 6 European, 4 US, 3 UK and 2 Chinese MNEs among oil’s 15 top performers suggests that environmental factors are of significant importance. Domestic and regional rivalry drives improvements in the aforementioned determinants and has opened possibilities of mergers. This can be seen in the poor performance of Middle Eastern companies which have had the luxury of state protection. Pressure to compete domestically positions a MNE to succeed internationally. Environmental factors hold strong secondary importance.

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