Analysis of Oil and Gas Industry and Trends

Question: Critically discuss the implications of recent trends and changes within the supply chain of the UK petroleum market. Answer: Introduction The report analyzes the implications of recent trends and changes within the supply chain of the petroleum retail market in UK. The report analyses the supply chain trends in petroleum market in UK, the factors influencing its development and the impact of these changes on the demand and supply channels and the long-term security of supply of petroleum. The report also discusses the impact of recent price rise in the petroleum industry and factors that shape the size of structure of current oil and gas market. The report discusses the potential of technological advances in the energy trade industry in the next decade as the petroleum resources are limited supply, oil companies are incorporating modern technologies in their systems to minimize wastages in the production cycle and produce more efficient fuels. The role of data management in the oil and gas industry is finding its way in the form of ERP models and efficient supply chains and transportation systems are being incorporated . The report discusses the causes of price volatility, impact of global economic conditions and impact of green energy development on the distribution channel of oil and gas industry in UK. Due to the recent surge in crude oil prices and the decline in economy, the oil and gas industry has experiencing a lot of changes in its production cycles and supply chain management functions; the report discusses how these recent events has affected the retail sector in UK markets and consumers. Oil and Gas Industry The petroleum market in UK has grown substantially in the last decades. While at the same time, the number of petrol stations in UK has decreased. This is an area of concern for the oil and gas energy because the customers are complaining of uneven distribution of petrol filling stations, especially in rural markets. Due to the market forces and changing patterns of consumer behavior, petroleum market is undergoing substantial structural changes. The number of dealer and company-operated petrol stations has decreased forcing customers to travel further and pay more for the petrol. Supermarkets now selling more petrol than oil firms do. In addition, less competition is driving up the prices. There are six operational crude oil refineries in the UK that caters to the demands of UK markets (Yusuf et al. 2013). The Crude Petroleum and Gas mining industry is in decline. The industry uses well-established technology and its product are well known. Although it has benefited from surging pri ces at periods, production volumes at existing fields are falling. Majority of the oil and gas fields in the United Kingdom were discovered decades ago and are in decline stage. Although firms are employing modern technologies to extract the remaining resources, this output usually comes at a higher cost. The commercial sustainability of new sources is even tougher to identify, and returns on investment in new oil wells are lower than previous developments. As UK oilfields have matured, the industry is shifting its focus from exploring new oil sources to increasing the productivity of existing less profitable sources (Perrons and Jensen 2015). Supply chain for petroleum: Crude purchase crude transport crude storage refining product transportation marketing product storage retailing (Joshi and Desai 2015). Petroleum industry is highly asset intensive and supply chain can account for 70% of overall cost. The industry is experiencing significant changes to the retail market for road fuels, that includes the increasing dominance of supermarket operated petrol stations that has not positively influenced availability of petrol and diesel for motorists. A study conducted by Deloitte that was commissioned by the Department of Energy and Climate Change, shows that overall the number of petrol stations in the UK has declined by 6 per cent in the last five years. This finding is in confirmation of the trend of closures of petrol stations seen in the past 40 years where the number of petrol filing stations has declined from 37,500 in 1970, to less than 9,000 in year 2011 (Brewer et al. 2014). Analysis of oil and gas industry and trends The future of oil and gas industry has remained uncertain over the past five years as the industry is trying its way out of recession coupled with rising oil prices and intense competition. Increase in oil prices has led steep increase in transport fuel costs and the demand is very poor. Global slowdown in economy and fears of future price raises has adversely affected the retail fuel sales (Dale et al. 2014). Individual customers have been gradually switching to more fuel-efficient, and alternate source of energy has negatively impacted the demand for fuel both for individual customers and the industry as a whole. Although the recent sharp decline in oil prices has delighted the industry, but the relative inelasticity of demand for fuel translating to a corresponding increase in demand as highly unlikely (Hannevik 2014). Major changes in UK petroleum retail market The number of petrol filling station has declined. PFS that has closed were mainly comprised of standalone dealer and company outlets while at the same time PFS owned hypermarket. Petroleum industry is negatively affected by the recent decline oil price. A combination of demand and supply factors fueled with slowdown in economy has les to this sharp decline (Hannon et al. 2013). Suppliers, mostly non-OPEC members have increased the production and US shale oil production units have contributed to this increased output. To make the situation worse OPEC producers led by Saudi Arabia has devised the strategy of maintaining current production levels in order to defend and grow market share by forcing more expensive unconventional sources out of the market (Tordo et al. 2013). Demand on the other hand is slower due decline in Chinese growth rate and the slow economic recovery in the European Union (Mena et al. 2014). These two factors have has led to reduction of oil prices. In the longer term, technological advancements and shift towards renewable energy will continue to bring the oil prices downwards. The UK despite being the largest producer of oil and second largest producer of natural gas in EU is experiencing steady decline in the output as it has failed to keep up with the demands of the market and has become a net importer of oil and gas (Lees 2012). The UK government is aware of the current situation and has developed key energy policies to address the issue of declining production of oil and gas industries. The measure suggested includes using modern technology to boost the recovery from the existing oil fields, exploration of new resources fields maximizing the production from new fields. To reduce the dependence on oil fields the government is increasing the investments on alternate sources of energy to meet the current demand (McNabb 2016). The UK's oil production and consumption is in declaiming stage, although preliminary 2015 data indicate a pause in this trend. Oil consumption in the UK peaked in 2005. Both production, which peaked earlier, and consumption have generally been declining since then. Since 2010, production has fallen at a faster pace than consumption, making the UK increasingly dependent on imports of both crude oil and petroleum products. However, the U.S. Energy Information Administration's preliminary estimates show that oil production increased by 100,000 b/d in 2015; while consumption stayed relatively flat. (Degiannakis et al. 2013). Although oil and gas production in the UK has not yet favorably responded to lower oil prices, investment in the UK's oil and natural gas industry is declining (Asche et al. 2015). The recent surge in the prices of the petroleum has had an adverse effect on the retail petroleum industry. Customers have shifted to more efficient and relatively stable energy sources. The increase of fuel prices has acted as an incentive for government and business organizations to invest in alternative sources of energy. People are exploring new avenues to satisfy their energy demands. Environmental groups are also pushing their agenda in the recent increase of oil prices. Added to the fact that the global economy is in downfall has further escalated the problems for petroleum retail industry. The retail sector in particular is most affected by the volatility of petroleum prices. They have to rethink their strategy of supply chain management. The inventory, production, customer service and delivery need further flexibility. The oil and gas companies have to formulate strategies to cut the operational costs and make the supply chain more market oriented. The need of proper product ion schedule, storage facilities, outsourcing and off shoring is being reanalyzed. The major costs involved in the supply chain are transportation and inventory management. There are not adequate inventory measures at the point which makes the oil prices volatile. The recent increase in crude oil prices has made the transportation cost less important relative to the inventory management. Oil companies are now investing on regional distribution centers to minimize the cost of transportation. With the establishment of regional distribution center for particular geographic area the companies can take the advantage of economies of scale by inventorying large capacity storages. Oil and gas industries are also reevaluating the need of moving manufacturing units from low cost countries to locations closer to the market to minimize the transportation costs. The price increase has also attracted the oil companies to provide better service to the customers by adopting direct to customer business model to exceed the customers expectation of service delivery. Effect of technological change in petroleum retailing industry: Petroleum industry has become complex industry due to the constant evolution technological changes in this sector. The oil and gas reserve are being discovered at geographically difficult locations, therefore it becomes the necessity of the industry to invest heavily on the techniques and machinery to be able to extract oils and transportation is other major factor. With the application of research and development the industry can streamline its operations and meet the demand of the markets. Due to the inferior quality of crude oil, price volatility, and environmental regulations that are forcing use of cleaner energy, the petroleum retailing industry is looking for technologies that produce high quality petroleum products with a concern for environmental regulations. New technologies are being incorporated in the refining of crude oil, minimizing wastes, and protection guidelines of the environment. Petroleum retailing is cutting cost by implementing backward and forward integration . The oil companies are focusing on developing infrastructure to retail its products (Allen et al. 2013). The role of middlemen in oil transportation and storage facilities are reduced to provide customers cheaper products. Another technological development in the oil industry is the incorporation of information technology in their operations. Use of satellites to explore new oil resources to the integration of ERP models in the retailing sector is shaping the supply chain of petroleum industries (Tan et al. 2016). Another aspect of technological implementation in oil and gas industry is monitoring of pipeline. The companies are pushing for cheaper, and more environment friendly pipelines and minimizing loss in the due process (Comyns and Figge 2015). Conclusion From the above discussion it can be concluded that the petroleum retail industry in UK is experience some major changes. The oil and gas industry is investing heavily to modernize the supply chain. The number of petrol filling stations has decline over time and is the main concern for the buyers as they have travel long distances to get the petrol. Retailing of petroleum outlets are being dominated by the super-market operated stations. There have been reports from the consumer groups that these super-market operated petrol stations are exploiting the customers by using their infrastructure and forcing the dealer and company owned petrol stations to exit the markets. In addition, the increase of crude oil prices is having an adverse effect on the oil and gas retail industry in UK. Government levies heavy takes on this sector which has increased the final costs of the products as the taxes are being transferred to the customers. Environmental concerns and to decrease the dependency on the oil and gas industry, the government is exploring areas of green energy. 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