SR limited is an oil drilling company based in UK and which was listed on AIM in 2007 with an IPO of $ 60 million. The company’s major shareholders are the large companies who own 96% of the company’s shares. Since its establishment some two years ago, it has been involved in various activities of trying to identify/locate oil and gas fields and which can be put into production. It does this through exploiting, appraising and doing the production in a responsible and safe way. However, the company has been experiencing some challenges and which urgent measures need to be kept in place to guard against them.
This paper presents some of the challenges that the company is going through and some of the recommendation that can be used to tackle/deal with the problems.
Raising the necessary finance to test drill all the new fields
In order to drill any well, finance has to be taken into consideration for there to be success in the drilling process (Kowalski, 2010). This entails first conducting some preliminary test to identify the location of the oil or gas reservoir and how big the reserve is before the actual drilling starts. This test are done in order to determine the character traits of the oil or gas reserve and to determine how best to bring them to the surface for production. The cost incurred in conducting the test drill is estimated to be around us$ 30 million. Raising this finance for the correct oil or gas test exploration is a challenge because some wells do not have sufficient gas/oil for exploitation hence may lead to huge losses to the company hence affecting the overall bottom-line of the company (rusco, 2010). For example, in the financial year 2011/2012, the company wrote-off us$15million which went towards the oil/gas exploitation in Drakkar and which proved to be a costly affair since it had no enough oil/gas for production purposes hence it underwent some financial loss. Since the occurrence of this loss, the company has been experiencing some challenges in funding its test drills activities so to identify a potential reserve for the production purpose. This is very risky for the company since on one hand it is in the business of finding new oil/gas reserves and on the other hand it is avoiding undergoing financial loss of exploiting reserves that are not promising in terms of having sufficient oil/gas.
- Consideration of the farm out offer from Drill Well
Farm-out entails assigning or selling an interest in a license to another oil and gas production company (Saddleback, 2009). The company so far has not being able to take part in farm out arrangements because it had some financial muscle to carry out the oil and gas exploitation with a lot of ease. However, recently it was awarded the license for drilling four new wells and it was in the business of surveying other eight new fields and due to financial constraint, it has been unable to proceed with the drilling process. The challenges with farming out with drill well is that
SR will have to conduct some test drill for the oil/gas fields within a given the specified time (31st march 2016). If they are unable to meet this deadline, SR will have to pay US $1 million and which can go even higher. This has the effect of affecting the overall bottom-line of the company (Sheng, 2013).
- Drilling well wants to be included into the board meetings whenever Georgia fields is the agenda for the meeting so as to ensure they are not shortchanged. SR will not have the final say on how things will be done since DW’s will have to approve them. This will limit the interest that SR on the Georgia fields since majority of the interest will go to DW.
- The normal buying price of a reserve is estimated to be US$ 11 per MMbbi but DW wants to be given a 10% discount. This has the overall impact of making SR to make lower margins despite the low risk. DW wills therefore much profit from exploiting the fields of Georgia.
SR will be required to pay US 10 million by 31st August 2014 and which is repayable when the above conditions are met. Incase the above conditions are not met or there is a breech of the condition, SR risks loosing the money hence it would undergo some financial loss.
SR’s dependency on fossil fuels and lack of future sustainability
The dependency on fossil fuel saw SR head offices targeted by protesters of the care green party. There was a growing concern for the need for the company to develop alternative and sustainable renewable source of energy (Gaffigan, 2010). SR was not the only company targeted during the protest since twelve other E& P companies were also attacked at the same time SR was being attacked. This appeared to be a coordinated attack. This resulted to some of the employees (Charles Lincoln) to walk some 400m to work and not park their vehicles where they used to park.
Sooner or later, the oil reserves will run dry and there will be no more oil to exploit hence there is a need for the companies E& P more so to develop alternative sources of energy. Environmental degradation and global warming has caused the world to awaken from the long slumber and address these issues because their impacts are devastating. The use and exploitation and use of fossil fuel within the industry has led to clearing out of large tracts of land (Deforestation), increased temperatures, rising sea levels, decline in the number of iced-capped mountains, health issues, human animal conflict and extinction of certain animals (Elena, 2011).
This public outcry has led to the establishment of signing of the Kyoto protocol which is a binding obligation linked to the United Nations framework convention on climate change. Each and every party is obligated to reduce the emission of greenhouses gases form their respective industries in the various countries. Countries are encouraged to develop and exploit renewable sources of energy like wind water and solar that sustainable and which are environmental friendly. SR is hereby obligated to find alternative sources of energy to reduce the effects of the global warming and environmental degradation (bale, 2009)
Corporate governance and corporate social responsibility in light of the issues with BoringHolesUK
BoringHolesUK, which has been having some good working relationship with SR in terms of regulating the activities of SR, has recently been experiencing some challenges in the Apache field off the coast of Africa due to some attacks from the militia. This has affected it operations with regards to system control and regulations. Finding new staffs and replacement staff has been a major concern for the company.
The corporate governance system is not effective at all since one of SR’s supervisors who was conducting some spot check visit, was able to notice some irregularities within the control log records. Apparently, the payroll records showed that Mr. Adam Green had left BoringHolesUK but within the records, Mr. Adams signatures were visible and which showed that he was carrying out some checks. This however did not affect the control functions within the operations of the wells but vital safety checks were necessary when it comes to the flow of oil. Some irregularities were happening without SR knowledge and to make matters worse is that some government officials are expected to visit the site very soon despite BoringHolesUK assurance that controls were done in a proper manner (Andrew, 2013).
The CSR policy of SR has been compromised since on the business ethics side, SR aimed at ensuring integrity in all its business activities but the experience with BoringHolesUK showed some irregularities and which could jeopardize if established the business of SR. On the health and safety side, SR hoped to ensure a high performance standards and safety of the working environment but with the attacks from the militia in the Apache fields, could make it impossible for SR to achieve this because some employees opted to leave for safety concerns (adedeji, 2013). SR hopes to strive to protect the environment in which it operates but this is impossible because of the environmental concern/effects from the company’s activities hence the reason for the protest from the public. Lastly on SR CS policy, the company aims at fostering good working relationship with all stakeholders and local society. The irregularities that happened under the watch of BoringHolesUK was not geared towards a cohesive working relationship since the company chose not to inform SR about the departure of Mr. Adam Green. Ensuring that this will not happen again this is the main challenge despite the previous good working relationship with the company.
Investing in renewable sources of energy
Renewable sources of energy would be best alternative for SR to venture into so as to stop the public outcry and sustain its business because the drilling of oil/gas will soon be history since some of the wells are drying up. In Europe for example, the cost structure of a 2mw costs roughly €1.23 million/MW while the income that it generates per in the first year is roughly around € 0.72 million due to initial cost investment but in the subsequent years, the income increased tremendously € 3.5 million and even higher to about € 4.4million when compared to oil exploration, one first conducts test drilling which amounts to US$15 million and then there is the actual drilling which amounts to US $30 million or more. All this amounts to $45 million or more (abbas, 2010). The amount of income that will be generated using wind is more plus the cost is slightly lower. Oil industry is faced with fluctuation of oil prices and which ultimately affects the overall company’s profitability but with the use of the alternative sources of energy, the prices are more stable and companies are the one in charge of setting the prices. The renewable sources of energy are also natural, plenty or in abundance and environmental friendly. For this reason the company would not need to worry about the future.
Merger with other E& P companies
The merger would enable the company plus its partner to form a formidable partnership hence boosting their capabilities to raise funds and reduce the overall cost of doing business. The issue of farm out which threatens to affect the bottom line of the company would be a history. The merger would also enable the company to use its diversified pool of experts to monitor the over the activities of the company hence reducing the challenges of irregularities within the operations of the company (Elena, 2011). The company will no longer need to outsource some services since it will be sufficiently capable to meet its needs. The merger would enable or make it easier for the company to receive more licenses for exploitation since they would be having a strong financial basis and well equipped with machinery and manpower to carry out the drilling exercise.
Issuing more share
Since the company is a public company, it can offer rights issues to its existing customers as a way of raising more funds to do more exploitation of potential gas and oil fields. This will be effective since interests are paid back to the shareholders. Through this, it would be easy for the company to estimate the amount of money it would need to raise so as to enhance its activities. Through it also, the company may receive more money than they had anticipated hence having excess money to boost its activities.
Companies that listed on a stock exchange easily attract more investors based on their performance. SR would need to improve on its overall performance if wishes to attract more investors since investors would only invest in well performing companies.
Appoint an oversight committee
The committee would be responsible for ensuring that corporate governance is adhered to and that the values, missions and goals of the company are met. The committee would be responsible for conducting routine check ups in the various oil fields to ensure minimum reduction of irregularities and that the company is operating within the stipulated laws governing its industry. This will reduce deviations from the overall corporate goals .The committee would also be providing advice to the board on areas that need improvement so as to ensure efficiency (William, 2008). The reason why there was some irregularities in the apache field was that there was no an oversight committee to check against irregularities that had happened for a long time.
Review of their policy
SR needs review and make changes to its CSR policy so that its action can be in line with the outlined policy. On occasional basis, they can review them so that it can be consistent with the changing environmental needs. The policy need not to be cast on stone but flexible enough to be adjusted. Some of SR policies were not adhered or were violated in the course of carrying out some of its activities. The revision of the policy would also ensure that they are able to offer addition training to its workforce so that they are able to address the various issues that may arise during the course of their work (Bale, 2009). Policy revision would also enable the company to employ new and well qualified personnel who would the company to operate efficiently and compete favorably with its competitors. Through it also the company would be able to identify some key areas that were inefficient and which were affecting on its overall performance and which were underlying issues that were overlooked. Through this the company would then be able to solve the bottle necks issues.
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