PROBLEMS FACING CONOCOPHILIPS
Businesses, inthe oil and gas sector, are facing numerous market and economicchanges that are affecting their profitability and operations.ConocoPhillips is a major global energy firm with its headquarterslocated in the United States. It also experiences these challengesbrought about by a downward trend in the prices of oil around theglobe. Market factors, such as an increase in the global productionof oil and a reduction in consumption, are one of underlying aspectsof the issue. Economic characteristics, such as a poor Chineseeconomy, which is one of the largest importers of oil has also causeda major impact in the corporation.
The key problemthat ConocoPhillips faces is a global reduction in oil prices and anincrease in operational costs that is reducing the firm’sprofitability. The reduction in process is brought about by marketand economic factors.
The marketfactors affecting the organization are long-term in nature and alsohave a significant impact on its profitability and other oil and gascorporations. Supply is a critical aspect of any oil and gasenterprise and includes the resources that are available forexploration and that which these firms can recover. The proven oilreserves have decreased in the past year, but there has been anotable increase in the number of oil reserves across the world (BP,2016). The proven oil reserves are those that geological andengineering information can quantify with certainty that they existin known reserves. Many countries are also discovering more oilreserves, which are increasing oil production, and it is estimatedthat there is enough supply for oil production for many decades.
For many oilproduction firms, such as ConocoPhillips, it may seem like oilreserves are in plenty and ensure its sustainability in the longterm. However, it is imperative to note that not all of these oilreserves are accessible. Evans (2009) asserts that only about one inthree barrels of conventional oil are available for production whilethe amount of unconventional oil is considerably less than that. Amore cynical perspective on oil production arises when discussing thepeak oil point. This is the point where more than half of the oilproduction reserves in the world are depleted. Decline in productionwill be inevitable if these levels are reached, and which has beenpredicted to occur in the next few years (Evans, 2009).
The demand forpetroleum also affects ConocoPhillips. The firm is witnessing anexcess supply of natural gas and petroleum, which is affecting theprices of oil across the globe. Mageuri (2016) claims that mostcompanies are underestimating the increase in consumption that isnecessary to level the demand and supply market. According to Mageuri(2016), oil consumption in the world should be more than 2.5mbd in2016 and more than 2mbd in the following year. However, the currentuse of oil in the world is around 0.9mbd, which arises due tonumerous factors. These include the high prices of crude oil, arelative change in consumption habits among the youth, efficiency,and the changing environmental policies in each country. The adoptionof alternative sources of energy is also negatively impacting thedemand for petroleum across the world. Market factors, such as theexcess supply of oil that ConocoPhillips have and the reduction inoil prices, have reduced the profitability of the company, which putsa strain on its operations.
Slow economicgrowth in major consumption countries, such as China, India, Japan,and even in the US, has caused an excessive supply of petroleum inthe market. The reduction in prices has a significant impact on thisweak economic growth and prompts ConocoPhillips to make changes intheir organizations in a bid to reduce expenses. The corporation hashad to effect job cuts and lower their dividends, which are one ofthe attractive incentives they offer to their investors. Doogan(2016) asserts that the firm has made about 120 job cuts in Alaskaarising from a global glut of crude oil supply and the weak Chineseeconomy.
Khan (2016)posits that there is hope for an increase in oil prices around theworld following some events across the world that has reduced globalsupply. The disruption of petroleum production in OPEC countries,such as Nigeria, which witnessed militant attacks on oils facilities,has forced Chevron and the Royal Dutch Shell Company to haltproduction. This attack on the major oil production areas in Nigeriahas been severe, and Angola has toppled the country as Africa`s majoroil producer. Suncor Energy, a key petroleum producer in the CanadianOil Sands, has also halted production after wildfires in the country.These incidents have stabilized the prices of the commodity from alow of about $27 to about $49 per barrel (Khan, 2016). The stabilityhas improved the profitability of the company in the short term, butit still faces challenges in the long run.
ConocoPhillipshas seen an increase in labor costs that affects its profitability asan oil corporation. The company has a large workforce, and thechanges in the labor costs in oil rigs are an inevitable cost thatcauses a rise in their expenditures. The organization is also faultedfor having an incompetent employee base that significantly affectstheir operations. These challenges affect the brand image of thecorporation as it is impossible to get similar services in theirdifferent businesses across the world. The cost of production andexploration of crude reserves in the company has also been on asteady rise. According to Chamberlin (2016), the firm has some of thehighest production costs in the industry as it takes them $12 to $20to produce a barrel of oil. The exploration expenses of the companyhave also eaten into their revenues. Evans (2009) explicates that thecost of exploration of petroleum in Saudi Arabia, which has plenty ofoil reserves, has increased from $4,000 in the 90`s to the currentprice of $16,000.
One of theessential solutions to the constant decrease of oil prices in theworld is advocating for a reduction in oil supply. ConocoPhillips isa global leader in the exploration and production of oil and naturalgas and is in a better position to lead other firms in reducing theirproduction capacities. As supply reduces, there should also be anotable increase in the demand for the products. ConocoPhillipsshould explore other markets that would increase the demand for theirproducts. The traditional global markets for crude oil such as Indiaand China are facing economic crunches and it is prudent for theenterprise to seek new frontiers to sell their products.
Addressing theglobal economic troubles that countries, such as China, are facing isalso important. As a key stakeholder in the state’s economy, thecompany can push for economic reforms that would help the economyrecover. These nations should strive to increase consumer wages anddebt so as to enhance the buying power of consumers.
The increasingoperating costs are also a major challenge for the company. The firmcan deal with this by restructuring its operations to ensure laborcosts, production, and exploration expenses are kept at theirminimum. Improving its technology in production will reduce theircosts and expand its ability to produce more oil.
ConocoPhillips isa large oil and gas corporation with multiple operations in more than40 countries around the world. The company faces a myriad ofchallenges both externally and internally. Market forces, such as anexcessive supply of oil and a reduction in global consumption, reducethe price of petroleum that affects the profitability of the company.Economic factors, such as a slump in the economy of various countriesand an increase in labor costs, are also some of the challenges theyface. The best solution of addressing these issues is throughreducing their overall production of petroleum and leading otherlarge firms to control their supply of oil until there is stabilityin the prices while seeking new markets.
Since the company has an excessive supply of petroleum, they shouldstrive to reduce their production and oil exploration activities forthe short term. It should deplete it reserves before it can proceedto increase their level of production. As a significant player in theindustry, it should make an effort to ensure other key oil producingcompanies are also reducing their global production levels to ensurethere is a reduced supply of oil in the market. This activity willensure that the industry can maintain stability in high crude priceswhich will assist in increasing the profitability of the business.The enterprise should also work on getting other key markets awayfrom China and India which have been experiencing poor economicgrowth. Exploring other unexploited markets such as Africa, Europeand South America would help increase the revenues of the firmsthereby increasing profitability.
BP. (2016). Oil reserves. bp.com. Retrieved 8September 2016, fromhttp://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy/oil/oil-reserves.html.
Chamberlin, A. (2016). Why did ConocoPhillips’ productioncost increase? Marketrealist.com. Retrieved 8September 2016, fromhttp://marketrealist.com/2015/01/conocophillips-production-cost-increased/.
Doogan, S. (2016). Economist: ConocoPhillips Alaska job cutswill hurt, but it could be worse. Alaska Dispatch News.Retrieved 8 September 2016, fromhttp://www.adn.com/economy/article/state-economist-conocophillips-alaska-job-cuts-will-hurt-they-could-have-been-worse/2015/09/03/.
Evans, J. (2016). ConocoPhilips. Ohio: Fisher College ofBusiness. Retrieved fromhttps://fisher.osu.edu/supplements/10/9160/2008-spring-conoco.pdf.
Khan, S. (2016). ConocoPhillips. Seekingalpha.com.Retrieved 8 September 2016, fromhttp://seekingalpha.com/article/3978444-conocophillips-2-reasons-cautious.
Maugeri, L. (2016). The Global Oil Market: No Safe Haven forPrices. MA: Belfer Center for Science and International Affairs.Retrieved fromhttp://belfercenter.ksg.harvard.edu/files/Maugeri%20Global%20Oil%202016.pdf.