Managing Small Oil and Gas Companies – What you must know as a startup – Part 2

Strategy-Plan-Prepare-Execute-Review

Now that we have discussed the legal foundations affecting establishing your company in part 1, we will go ahead to discuss how global conditions impact or will impact your company.

The basics of starting a small oil firm is no different from staring a typical trade business. Thus, you would have had to be sure that you understand the industry you are committing your investment in the macro sense or that you have a clear competitive advantage in the exact service you intend to render.

Before we get started on the specifics, let’s take a look at what internationalization means. Buckly and Ghauri (1999) explains the terminology as ‘a firm’s increasing involvement in international operations’. Welch and Luostarinen (1988) also define internationalization as ‘the process of increasing involvement in international markets’. Other attempts to explain the terminology results in a similar underlying meaning except a few stress on the use of internal resources. Several rather important facets of internationalization such as culture, legal regimes, and general bilateral and multilateral trade agreements, et cetera, are important to discuss, however, this article will focus mainly on the internal strategy and management key focus areas.

One very critical feature of an oil and gas company is how knowledge intensive they are, often requiring highly skilled workers and continuous knowledge refreshment of semi-skilled workers especially relating to production standards.  To be knowledge intensive means ‘having a high added value of scientific knowledge embedded in both product and process’ according to Coviello (1994). The fact that small oil and gas companies cannot totally do without aspects of internationalization due to the highly scientifically standardized nature of processed and products makes it imperative for every entrepreneur to make the phenomenon feature greatly in the initial market survey and strategy (Bell, Crick, & Young, 2004).  The factors below are a key consideration in the initial stages;

Key Strategy Factors at Startup
Key Strategy Factors at Startup
  • Ownership and Management

In the Ghanaian context, as we discussed in the first part, some level of foreign expertise is needed to succeed. After all Ghana’s stage in the petroleum sector is still considered as early. This means that the country still needs to accomplish a high level of knowledge transfer from the various International oil companies. The laws regulating the sector has made reporting and implementation provisions to ensure this happens. The majority of small oil and gas services companies are mostly going to be joint ventures with imported technology and products but if the laws of the competitive market plays out as it should, there will be some level of wholly owned local start-ups who may be breakaway joint venture entrepreneurs with adequate knowledge carried on from the joint ventures including the knowledge of fluid supply chains and ease of transactions emanating from formal relationships with foreign supply companies. It is quite important to consider how the company should be structured from inception in order to layout the strategy options.

  • Product and Market Strategy

Various international markets have varied needs and this usually causes product development to satisfy the markets (Bell, Crick, & Young, 2004). Internationalization leads to a closer relationship between product evolution and the strategies employed in the markets. The expansion of products invariably leads to ease of penetrating new markets. The initial strategy may not incorporate elaborate plans on product expansions and specific market entry strategies but it is most definitely worth considering the possibilities in the medium term strategies which accelerates with process innovation, specialization and increased demand for product variants.

  • Technology

Internationalization may cause the acquisition of new process technology. The demand for a variety of products through entering new markets may force the change in strategy for process technologies. Local adoption of standardized products may be a challenge as there is always a tension from what is termed the globalization paradox (De Wit & Meyer, 2007). The strategic approach to such possibilities should be given some consideration from the onset.

Complexity of Legal Regimes and business transactions

Dealing with multinational companies can be quite difficult especially considering compliance with laws. You may find that as a young company, you are having to dedicate some appreciable amount of your scarce resources in legal and general consulting fees.  The need to close contracts requires some paper work looking to cover the legal compliance and policy reporting requirements of Ghana and a number of other countries depending on the legal regimes guiding the multinational companies often forced by cross-border activities or resources dedicated to projects outside Ghana. There are obviously treaties and conventions that lessen in essence, transaction costs and reporting requirements but these are based on specific negotiations between Ghana and other countries or international organizations. Managers need to be proactive with regards to laws especially when it comes to new contracts. This will aid in planning costs and external resources required to examine the cost and benefits of a proposed project and lessen the possibility of costs in disputes over contracts.

Politics of oil prices

Whether your company is in the chemicals industry or hardware fabrication, your revenues will some correlation with oil prices. For example, oil prices by default are tied to revenue streams of large oil and gas companies and thus, if there are huge unexpected variations in prices of crude oil and natural gas, the decisions by the large companies will affect smaller firms in varying degrees. Oil prices are largely dependent on the economics of demand and supply, albeit the politics of oil producing companies and oil conglomerates play a huge role in determining the supply and demand. Strategically, oil producing countries make decisions to improve their economies and also often employ market steering tactics to approve or reject occurrences in the industry. Such politicking may impact small companies who may in turn not be strong enough to avoid a direct hit. Strong financial skills are required to shield heavy adverse impacts of petroleum price wars.

Conclusion

As a small business in the oil and gas industry, issues of standardization may initially start out as pressure from regulatory bodies especially from regulators of the specific product on offer. As the company begins to expand and transcend international boarders the pressure for meeting these goals shifts to management and becomes a key to market strategy success or failure thus, pushing the boundaries of available process technologies. The regulatory bodies may be local such as the Ghana Standards Authority (GSA) or the Food and Drugs Authority (FDA) or may be international organizations such as the World Trade Organisation (WTO). It is important to include in a blueprint of your company all possible decision nodes regarding the possibility of effects of internationalization and or standardization as this may increase investment commitments as well as key strategic decisions.


Part 1|See References